The Investment Column: Gaming sector is still a risky bet

Time to get out of gear maker Torotrak; Care UK can make most of political wind
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The Independent Online
There has been a backbench rebellion over the prospect of shady US gambling outfits concreting over England's green and pleasant land to build gaudy, Las Vegas-style casinos which threaten to turn us into a nation of alcoholic, wife-beating, slot machine-obsessed desperados. It has played right into the hands of UK gaming companies.

There has been a backbench rebellion over the prospect of shady US gambling outfits concreting over England's green and pleasant land to build gaudy, Las Vegas-style casinos which threaten to turn us into a nation of alcoholic, wife-beating, slot machine-obsessed desperados. It has played right into the hands of UK gaming companies.

Ministers backed down and capped the number of "supercasinos" at eight, removing the threat to the three quoted casino operators who lack the experience and finance to compete for supercasino developments.

So Stanley Leisure, Rank ­ owner of the Grosvenor chain ­ and London Clubs International (LCI) look to be beneficiaries of the Gambling Bill. The trio can now focus on what they do best: smaller casinos, which will be allowed up to 150 slot machines. The Bill will also abolish the 24-hour rule, under which you must be a member for a day before you play, and the ban on casino advertising.

LCI, a pure casino operator, appears to have the most to gain from deregulation, as it already has reasonably large premises that could take more slot machines. Rank, however, has a large bingo hall estate, whose traditional punters might desert to the casinos. While these bingo halls could well be converted, the Government is also rightly worried about the proliferation of smaller casinos. Further limitations could ensue.

Stanley's position looks more precarious still, with an estate of small venues and its hopes pinned on winning supercasino licences in Leeds and Birmingham, where it has built what it hopes will be a qualifying resort. That is far from certain. Meanwhile, Stanley's London casinos are prone to volatile earnings, since high-rolling gamblers occasionally take the house to the cleaners. Revenues from fixed-odds betting terminals in Stanley betting shops would also face additional competition.

Stanley will update investors on trading today, and while casino trading is thought to have improved, the market will stay nervous while so many questions over deregulation remain. The Bill still has a long route through Parliament ­ it could see many changes and may never even become law. So the expansion of the sector is still a risky punt.

In that light, the shares of LCI, due to report interim results on Thursday, look expensive at 25 times 2005 earnings, but are the best bet in the sector. Rank also owns the Hard Rock Café chain and a film processing unit, which are both a drag on earnings, but it is worth holding for its casino expansion potential. Stanley's strategy has been consistently wrong. Avoid.

Time to get out of gear maker Torotrak

Torotrak is gearing up, if you'll pardon the pun, to put a prototype of its revolutionary gearbox into a major car manufacturer's latest model for further testing. Which is good progress, albeit no better than planned, and the reason that these highly speculative shares shot up by more than 20 per cent to 55.5p yesterday.

Torotrak's Infinitely Variable Transmission is a gear system for automatic cars that adjusts to the most efficient level, improving fuel efficiency and making for a less clunky drive. But while the statement accompanying results from the company yesterday was as upbeat and optimistic as ever, the results themselves were a very long way short of the forecasts published by the company's broker, Evolution. The shares ought to have gone down, in all honesty.

Revenues from consultancy work for its development partners was down compared with the previous six-month period. The company says it is being paid in kind, with useful hardware, but Evolution is not forecasting any corresponding fall in costs.

The True Believers will argue that the technology will win out in due course, and it only has to be adopted in an off-road vehicle or two for the company to soar into profit. True, but lower revenues mean an earlier date when the cash runs out. We said avoid last year at 75.5p. Now, sell.

Care UK can make most of political wind

One demographic trend: more old people needing more treatment from local councils and on the National Health Service. One political trend: a desire to increase the flexibility of the NHS by introducing private companies to deliver more and more services.

One company: Care UK.

It runs nursing homes and offers home helps to local authorities, and is starting to find that councils are putting out to tender wide-ranging contracts that combine the two. There is much still to go for in this area.

In a joint venture with Afrox of South Africa, it has set up treatment centres which will conduct operations under contract with the NHS. It ought to win more of these in the New Year. It has also gone into doctors' out-of-hours cover as a first step to winning business when surgeries start to take over more hospital work.

The shares are up 26 per cent on when we tipped them as a long-term buy in February and are now on 20 times current year earnings. That can ­ just about ­ be justified by looking to the long-term trends and the medium-term uplift to earnings forecasts that will come from big new contract wins. The risks are of delays to those contracts or clinical slip-ups at the new treatment centres.

Hold.

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