Recovery at Stakis falters

THE INVESTMENT COLUMN

The remarkable recovery at the Stakis hotels and casinos group - which has been fighting back from steep losses in the early 1990s - missed a step yesterday as the Glasgow-based company warned that its gaming side had suffered a like-for-like reduction in money wagered. The market greeted the fall with a 3p mark-down in the share price to 78p.

While disappointing, the slow-down at the casinos was offset by continuing growth in the core hotels business, where the average room rate in the fourth quarter just finished increased from pounds 41.61 a year ago to pounds 45.06 in the three months to October.

Occupancy rates also increased usefully - from 77.9 per cent to 79.6 per cent - boosting the average for the whole year from 69.7 per cent to 72.1 per cent.

Since new management was brought in to replace the ousted Andros Stakis in 1992, the rescue of the company from the brink of collapse has been handsomely rewarded by the market where the shares have soared from a low of 21p to a peak last year of 92p.

Falling costs, sensible disposals, a restored balance sheet and a cyclical upturn in the hotel trade combined with casino deregulation to provide a healthier backdrop than the shares had enjoyed for years.

Since the spring of 1994, however, the shares have floundered as the market fretted over the company's sharply rising tax rate now that the tax losses accumulated during the aggregate losses of almost pounds 100m in 1991 and 1992 are working through. Although Stakis is only expected to pay corporation tax of about 10 per cent last year and this, the rate is forecast to rise quickly to 28 per cent by the end of the decade.

That will seriously dilute profits, wiping out any growth the company can achieve over the next few years, even assuming a peaking economic cycle and already relatively high occupancy rates allow much improvement. According to Panmure Gordon, even if profits increase by an average 10 per cent a year to the turn of the century, earnings per share will only rise from 5p to 7p. That in turn is likely to mean that dividend growth is curtailed, and what the shares cannot offer in earnings growth they will be unable to make up for in income.

The shares are underpinned by net assets close to the share price, but are unlikely to provide much excitement.