The Investment Column: Sportingbet counting its winnings from online poker

Drug-testing group VastOx needs more time; Outlook is poor at JJB Sports
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The Independent Online

Most of the rest of the industry professes itself mystified by the downbeat comments of the market leader. Results from its rival Sportingbet (owner of Paradise Poker) yesterday showed that growth in new players remains strong, and that the amount of money gambled by players is holding up.

Best of all, Sportingbet was able to reassure the City that, unlike PartyGaming, it was not having to spend a fortune on marketing to attract new business. The odd poster of a scantily clad Caprice notwithstanding, it has kept the so-called "average cost of acquisition" to $132 per new customer, compared with over $200 for the market leader. Sportingbet has been able to cross-sell poker to customers of its other casino games and its core sports betting business. A new "shared purse" makes it easier for customers to place bets across all Sportingbet's gambling opportunities.

It will take time to establish exactly what is going on in the online poker market, and it is likely that growth will become more measured, but gambling is as old as money and it seems likely that more than the current 3 per cent of wagers will eventually be made online. The lesson should be that robust, established and flexible companies with a broad range of gambling offerings and a spread of geographical markets are going to be the least volatile investments for those wanting to speculate on this emerging phenomenon.

Sportingbet is just such a business. Much is made of the fact that online gambling is illegal in the US, but that has not stopped Sportingbet establishing itself. It seems unlikely that conservatives will force a clampdown to damage its business, and meanwhile it keeps US companies from setting up rival operations.

Sportingbet announced its first dividend yesterday and is profitable enough to become quite generous a payer. Buy.

Drug-testing group VastOx needs more time

VastOx is the second company set up by Stephen Davies, professor of organic chemistry at Oxford University. He sold the first, Oxford Asymmetry, for £316m in 2003. He has even greater ambitions for VastOx.

The company is offering services to a pharmaceutical industry crying out for ways to speed up the search for new drugs. Many chemical compounds only reveal their side effects when tested on animals or, worse, in human trials. VastOx tests compounds on zebrafish embryos (whose genetic make-up is pretty similar to the human, it turns out) in the hope of turning up problems early in the process, saving time, money and the need for using the larger animals that get anti-vivisectionists so angry.

That services business is showing early promise. After little more than a year of operation it had sales of £201,000 in the six months to 31 July. But it will not justify VastOx's market value of £58m. Much of the hope rests on a handful of drugs it plans to develop of its own: for muscular dystrophy and spinal muscular atrophy. These will require more money to progress into trials than it seems likely VastOx can generate internally, even though it has a prudent management with a decent track record.

Hold off until it is a little more established.

Outlook is poor at JJB Sports

Dave Whelan's chairmanship of Wigan has taken the football team into the Premiership, but the sports retailer he chaired until July is fighting a losing battle against relegation from investors' portfolios.

JJB Sports has just reached half-time in its financial year and the scoreline is bad. Pre-tax profits fell by a third to £18m. True, it lacked a major football tournament to boost sales of replica shirts but its problems are rooted deeper than that.

Rivals are slashing prices on sportswear in an attempt to stay afloat. Allsports went bust last week. And JJB itself warns that margins will be lower in the second half as it slashes its prices to compete.

Its hopes are pinned on stocking more exclusive lines from Nike and Adidas but that strategy begs the question of how exclusive is exclusive if others follow suit?

The group has established a useful sideline in health clubs, which it is opening in tandem with new out-of-town stores. The retail space sits on top of the gym yet JJB only pays rent once for the site, effectively giving it the shop for free. It had 28 of these dual format sites at the end of the half-year and will have 42 by the end of next year. It takes time for the clubs to hit maturity - they need at least 4,000 members to turn a profit, yet open with less than half that - so the new clubs should provide a useful future earnings stream in due course. But with weak consumer spending threatens gym membership numbers in the short term.

We tipped this company the last time it lost its way in 2003 and it enjoyed a strong surge over the following year. Now things look dark again - the shares fell 3.75p to 164.5p yesterday - and Mr Whelan's 39 per cent stake looks like it could be sold to fund his new Premiership hobby. With the dividend barely covered by earnings and the outlook grim, it's time to sell.

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