Investment Column: Odds turning against William Hill

India success makes Cairn a worthy hold; Mice looks likely to be a big cheese once again
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The Independent Online

Punters who followed our advice and bet on William Hill's shares when it floated two years will be chuffed that their gamble paid off. All of the gaming group's numbers have come up since then and its stock has more than doubled during the past 12 months.

Punters who followed our advice and bet on William Hill's shares when it floated two years will be chuffed that their gamble paid off. All of the gaming group's numbers have come up since then and its stock has more than doubled during the past 12 months.

The company relies on three main income streams: its betting shops, its telephone arm and its internet site. Yesterday it said all three had romped home in style during the first 19 weeks of its year, helped by bookie-friendly horseracing results. Just five of the 20 races at this year's Cheltenham Festival were won by favourites, compared with 10 last year.

Hill's gross win - what the punter leaves behind - was 22 per cent ahead of the previous year, reflecting the benefit of giving its punters more ways to lose their cash. Each of its betting channels grew by double digits.

Since listing, the group's profits have galloped ahead on the back of two step changes to the industry. The first was the switch to taxing gross profits; the second was the advent of fixed-odds betting terminals (FOBTS). These souped-up slot machines allow punters to play roulette while waiting for the next horse race to start. So far, Hill has installed 3,500 FOBTs across its estate; it is targeting 4,000 by the end of June.

But the new regime governing how many FOBTs bookies are allowed threatens to wipe the grin off the chief executive, David Harding's, face. The number of machines, including traditional one-arm bandits, was limited to four per shop. By opening longer and strong-arming its suppliers to improve their terms, Hill said the average net weekly profit per terminal had risen from £380 last year to £400 since the new FOBT code was introduced on 1 April.

With Hill's FOBT rollout nearing its final furlong, its benefits from the machines will unwind. Until Hill opens serious talks with casinos - the big winners from gambling deregulation - its shares, down 2.5p to 537.5p, are likely to tread water. Take profits.

India success makes Cairn a worthy hold

The oilfields of India are proving to be more like gold to Cairn Energy, which yesterday announced yet more success in its Rajasthan site.

The second stage of drilling following its original find has not only confirmed initial expectations but led to an upgrade in its estimated reserves. The lowest hope had been for 50 million barrels from the site; now it is for 100 million barrels.

Combined with an oil price higher than ever, Cairn looks to be sitting very pretty. Much to the embarrassment of Shell, of course, which sold the Rajasthan field to Cairn two years ago for just £4m.

The question, then, is with the Cairn share price already more than double where it was at the start of the year, are the shares are now over-hyped?

At 996p, they are trading at a mighty 28 times forward earnings. This premium has been justified, given the apparent abundance of reserves, but it will be some time before any of the oil currently being discovered is actually put in a barrel and sold. The tap will not turn on, in fact, until the second half of 2007.

And while news of further successful drilling on its 5,000 sq km site is all but guaranteed, there may be less of a gush in the shares on further announcements.

The shares moved only marginally yesterday, as most investors have already priced in expectations of more finds, and the fields that are still to go through the second-stage drilling are much smaller in size. There is still some upside to go, however, making it a very worthy hold.

Mice looks likely to be a big cheese once again

Mice Group, the marketing and conferences company, has come a long way since this column tipped it 18 months ago. Back then, its shares were languishing at around 50p - a long way off its 2000 highs of more than 160p.

But while progress in 2003 was promising, the market has lost interest over the past six months as its profits growth has begun to slow.

After recovering from the hit that many media companies faced in 2001 and 2002, investors are now anxious to see whether the company is in for a period of consolidation or can deliver a swift return to growth.

Yesterday's news of a £7.9m pre-tax profit for the year to 28 February was in line with expectations but came with the unexpected and encouraging revelation of a 33 per cent rise in the company's order book - a good sign for the coming year.

This, combined with the much improved prospects for the global media sector as a whole, means it looks like MICE may yet find its way back to being the big cheese it once was.

With the wind behind it, its shares have now got the potential to fly over the next 12 months, with even the most pessimistic analysts predicting the shares could top more than 90p - more than 30 per cent above current levels. The recent poor performance in the shares provides an ideal buying opportunity.

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