The Investment Column: Spanish move makes William Hill a good bet for the long-term

BAT; Arc International
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The Independent Online

Our view: Buy

Share price: 639.5p (+16p)

William Hill's international aspirations were probably the most interesting part of yesterday's trading statement from the UK's second biggest bookmaker. The group revealed that it and its Spanish partner Codere plan to apply for a sports-betting licence in Madrid and raised the possibility of rolling out operations in Latin America where Codere also has a presence.

Securing a partner with local contacts and experience is a wise move for any company looking to expand abroad. Codere has a slot machine operation in Spain and through much of Latin America. William Hill hopes to take advantage of a proposed law to allow sports betting in Spain. It also has Italy in its sights where the industry is also being deregulated.

The two southern European countries are considered the Continent's most lucrative gambling markets after the UK. In Italy, William Hill is focusing on the north of the country - namely Turin, Milan and Rome - and will avoid the south where large parts of the betting industry are run by organised crime syndicates. However, Spain will be its primary focus outside the UK.

The bookie yesterday also assured investors that its full-year profits would meet forecasts. In 2006 it received a boost from the World Cup and emerged £17.5m better off as a result of the football tournament and the integration of the 500 betting shops it bought from Stanley Leisure. The main drag on its profits came from a new licence duty on gaming machines. At 14 times forward earnings, William Hill is a good long-term bet.

BAT

Our view: Buy

Share price: 1,491p (+32p)

The ethics of investing in tobacco companies aside, a research note from Dresdner Kleinwort yesterday made British American Tobacco, the maker of Lucky Strike and Pall Mall brands, sound like a great blue chip play. The broker believes that in its annual results statement on 1 March BAT could well herald a further round of cost cuts across its business. This would leave the company in a position to return substantial sums of money to shareholders.

A look at the group's balance sheet shows that it is already hugely under-geared and any further cost savings would leave the company with yet more idle money.

At present, BAT yields just over 3 per cent, making it the 31st highest yielding stock in the FTSE 100. But Dresdner argues that the tobacco giant could easily raise its dividend so that its shares yield 5.5 per cent. That would make them the 4th highest yielder in the blue chip index. It believes that the start of a more aggressive dividend policy might also be announced with the company's forthcoming results.

Even without the boost of further cost savings and a dividend hike, BAT shares look cheap. They trade at a 13 per cent discount to the wider European tobacco sector.

Although BAT has seen its value rise by two thirds in the past two years there is plenty more upside in the stock.

Arc International

Our view: Worth a punt.

Share price: 36.25p (+2.75p)

ARC develops technology used in semiconductors which in turn power electronic devices like digital cameras and laptops. Its key selling point is that its technology is more flexible and configurable than rival systems.

The company has spent a few years in the wilderness, but, as yesterday's bullish trading statement showed, things are once again on the up at Arc.

Results in the group's second half have exceeded forecasts and sales should come in at around £13.3m - a 46 per cent increase year on year. The broker Panmure Gordon expects the company to break even next year.

ARC trades at a significant discount to others in the sector, like Imagination Technologies, and has a cash balance of around £32m that underpins more than half its market capitalisation. With revenues rising and product credibility improving, the shares are worth a punt.

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