The Investment Column: Recent rally makes now a good time to book profits at Lonmin

Burberry Group; Applied Intellectual Capital

Our view: Take profits

Current price: 3,200p

BHP Billiton's unsolicited bid for Rio Tinto has reignited interest in a sector that hardly needed much more support – if it were not for the miners the UK index would probably be well below 6,000 by now.

Yesterday's interim results from Lonmin, the world's third-largest producer of platinum, gave the sector more momentum as traders marked the shares higher on results that were, for the most part, slightly ahead of forecasts. The company had already told the City that it would not match the pre-tax profit number of 2006, but the $794m it reported was ahead of revised estimates. Underlying earnings per share were down by 5.2 per cent to $2.959, approximately in line with profits, while revenue rose 5 per cent to $1.9bn.

However, investors should not be fooled – this was a disappointing year for Lonmin and much of the improvement has been down to the strength of the Rand against the dollar and much higher selling prices, up 23 per cent against 2006. But like most of its mining peers, production costs are rising rapidly while production fell.

Looking ahead, the company does not expect output to rise by more than half a per cent in 2008 and cut its forecasts for 2010, by which time it should be producing more than 1 million ounces of platinum per year – three years behind its original schedule.

Although we remain bullish on the longer-term outlook for the mining industry, we also remain convinced that shareholders should not shy from banking profits from time to time. Lonmin trades on more than 20 times forecast 2008 earnings, a full price, and despite this set of results the company has had its fair share of luck and benefited from the usual bid speculation.

But the operational problems are still to be fully resolved, costs are unlikely to level out at any time in the near future and the dollar will not stay weak forever. The long-term story remains intact but, for now, investors should take yesterday's strong rally as an opportunity to bank some gains without selling out completely.

Burberry Group

Our view: Hold

Current price: 612p

Given the negative press the Burberry brand endured once its eponymous check became de rigueur for chavs, the company remains incredibly successful with luxury consumers. Perhaps there really is no such thing as bad publicity.

Yesterday's interim results were decent, if not spectacular. Operating profit rose 12.9 per cent to £95.1m, at the lower end of City forecasts but, given the tough operating environment and the strength of sterling relative to Burberry's other major currency exposure, the dollar and the yen, this is an acceptable performance.

Like, perhaps, many of its customers, Burberry is itself going through something of a facelift – called, for some inexplicable reason, Atlas – streamlining its supply chain, locations, manufacturing and procurement procedures. Atlas is proving to be rather expensive, more than £16m in the last nine months and the plan continues to be a drag on profits. Atlas is due to complete next year.

The company remains comfortable with City forecasts for the rest of this year and for 2008, even if it declined to comment on trading in the US yesterday. It seems that the world is full of people more than willing to pay more than £1,500 for a handbag. Wholesale and retail sales showed more improvement and the company expects retail space to grow by 12 per cent year-on-year in the second half.

The balance sheet looks robust with almost no debt and strong cashflow, but even if the company is trading on a discount to some of its luxury goods peers at 16 times forecast 2008 earnings the stock looks expensive enough in this market. Don't chase them up – hold.

Applied Intellectual Capital

Our view: Risky buy

Current price: 250p

Anyone lucky enough to take a punt on Applied Intellectual Capital (AIC) back when the company floated in January is now sitting on exactly two-and-a-half times their money – not a bad return in any circumstances.

The company is a developer and funder of alternative electro-chemistry technologies aimed at waste reduction, energy saving and water purification. The company yesterday announced that it intends to reverse its RedOx business into an unnamed Aim cash shell, further proof that its activities are developing real commercial value.

RedOx ha been set up by AIC and will own the rights to its metal mediated redox technology, a process that turns waste cellulose into feed stock to make biofuels including ethanol. Crucially the process is a chemical rather than a biotech solution that does not require the use of food stuffs. Investors in AIC will be able to participate in the growth of RedOx as the company intends to maintain a significant stake in the new business. This is one of four live projects AIC is working on – the others are mine waste recovery, energy storage and water purification.

While this is certainly not a stock for the faint of heart, and at the moment any kind of reliable valuation method is impossible, AIC looks to have lots of potential left over. A high-risk buy.