The Investment Column: Weakness in Asian funds takes toll on Schroders
Published 31/10/2007 | 09:31
Our view: Take profits
Current price: 1,547p
The wisdom on investing in asset managers is that their stock tends to track the market. After all, management fees are linked to the value of assets under management which tend to move in line with the underlying index. But the wisdom is sometimes wrong – Schroders shares are up more than 50 per cent in the past year and, unless we are mistaken, the market isn't.
Yesterday's third-quarter numbers could add to the momentum, as Schroders reported a 53 per cent jump in profits to £98.1m in comparison to the same period of 2006, bringing its total for the year to £283.7m, up 45 per cent. The results were ahead of forecasts, boosted by better-than-expected returns from private equity, sales to retail investors (up £1.5bn in the quarter) and private banking. Private equity profits trebled to £20.2m, while private banking delivered £11.3m of profits, a 64 per cent improvement.
Total funds under management remained flat, despite the decent equity market conditions. Institutional money has been leaking out of Schroder's Asian and mid-market funds, and although money has not been haemorrhaging, the lack of growth in a favourable environment is a concern.
Investors in Schroders need to ask themselves two things: to what extent is this quarter's performance based on exceptionals, and is the valuation looking stretched? The private equity market has worsened dramatically, so there must be doubt about the company's ability to repeat this performance. And on more than 16.5 times forecast 2008 earnings, the stock is certainly at the top end of its valuation range.
Although we remain bullish about the long-term prospects for global equity markets, there are plenty of reasons for investors to remain cautious in the short term. On that basis, the sensible advice on Schroders has to be to bank profits.
Our view: Buy
Current price: 250.75p
It is seven months since Dave Shrigley took the reins at Wolfson Microelectronics, and given his background, 18 years at Intel, his appointment was greeted with enthusiasm. However, it hasn't panned out quite like he would have hoped – the stock has fallen more than 21 per cent since his appointment.
But things are beginning to brighten up for Mr Shrigley – yesterday's third-quarter numbers beat forecasts with a 36 per cent jump in quarterly profits to a record $14.7m on revenues of $70.4m, up 21 per cent and another record. The company also told investors it expects a better-than-forecast final quarter, indicating revenues for the full year of between $226m and $233m.
Wolfson makes microchips that are used in a range of consumer devices. Its customers include some of the biggest names in the industry – including Sony and Apple. Wolfson is coy about its manufacturing relationships, but it is a safe bet to assume its chips are being used in the iPhone and the iPod.
Despite what look like an excellent set of numbers, the market sent its shares tanking to close almost 10 per cent lower yesterday. The reason is the weak dollar – almost all of Wolfson's revenues are in dollars, but almost all of its costs are in sterling. As a result, the company's margins fell, albeit to a healthy 52.6 per cent.
Still, Wolfson looks to be heading in the right direction. On 17 times forecast 2008 earnings, its shares are far from cheap, but its major customers are still developing their products and Sonaptic, acquired by Wolfson in July, expects to ship its first high quality audio chips in the first half of 2008. For high risk investors yesterday's selling has created a decent buying opportunity.
Our view: Hold
Current price: 39p
A slice of humble pie for us, courtesy of Humberts. Just two months ago we recommended the estate agency group as a "risky buy". Hopefully we made the risks clear enough, because since then the shares have tanked.
For anyone trying to sell a house over the past two months, yesterday's profit warning cannot have come as much of a shock. Thanks to the collapse of Northern Rock, the housing market has hit the skids.
September is one of the key months for the housing market – had Rock collapsed in December the impact would not have been so bad, or so immediate. As it is, Humberts now expects to report worse-than-expected full-year profits for the year to September.
That said, much of the bad news was priced into Humberts, which runs 70 estate agents mainly in rural locations where house price falls have not been as sharp as in London. The broker Panmure Gordon is pencilling in full year pre-tax profits of £4m and per share earnings of 5.2p.
If it hits those numbers the stock is cheap – on just 7.6 times this year's forecasts. Chief executive Max Ziff bought 150,000 shares yesterday at 40p, and while we would not encourage investors to follow suit there is a strong case for hanging on as the market shows signs of getting over the Northern Rock shock.