Bottom Line: Vardon locks up strong growth

VARDON has yet to celebrate its second birthday, but from just two dungeons it now encompasses 13 Sea Life Centres, 10 bingo clubs and a seal sanctuary in Cornwall.

It has chosen a good time to expand. The hangover from the Eighties excesses means acquisitions can be made at little premium and development sites can be picked up cheaply.

Its businesses may look a strange mixture. The inside is nothing more complicated than a cash register fed by its mass-market leisure operations.

And very profitable they are too. Vardon made pounds 2.16m before tax in 1992 from nine Sea Lifes and the two dungeons, and yesterday reported a pounds 5.14m profit for last year including a seven-month contribution from bingo.

With more than 4.5 million customers pouring through its doors each year, even a 10p rise in average spending can have a significant impact on profits. Last year Sea Life and dungeon prices rose 4 per cent, and a similar increase is likely this year. In bingo, however, its focus is on encouraging customers to spend more in the bars and restaurants rather than in raising admission prices.

Where does Vardon go from here? Forward, but at a more conservative pace. Up to four bingo clubs - on which it managed a 20 per cent return on capital in the first year - and two or three Sea Life Centres, possibly on the Continent, will be opened each year. It may add a third division to its leisure and business interests, which shareholders could be asked to fund through a rights issue.

Vardon's cash flow is strong, and it is set to end this year with gearing of just 15 per cent. Based on forecasts of pounds 7m, the shares are on a p/e of 20. While that is racy for the sector, Vardon justifies the premium and is worth buying despite the rights risk.