Shares: Leisure looks a good bet

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The Independent Online
MURPHY'S LAW (anything that can go wrong will) has been working overtime in the hotel and betting sectors in the past 12 months. Queen's Moat Houses, still suspended, has run into problems with its bankers, Forte cut its dividend and even the Grand National was cancelled.

But contrary thinkers will know that this flood of bad news, which may culminate in Ladbroke, the betting, hotels, DIY and property giant, cutting its dividend when it reports next month, is a classic stock-market 'buy' signal.

Forte's shares have hardly looked back since it cut its dividend. There could also be benefits from an easing of the rules on betting shops, allowing them to be made more inviting.

My favourite share in the sector, Stanley Leisure, at 250p, is not remotely considering cutting its dividend. Despite losing an estimated pounds 250,000 of profits because of the non-event Grand National, it has weathered the recession in style. Business began to pick up in October and has kept going ever since.

Organic growth is running at better than 5 per cent but not in double figures. If that does not sound like a signal to break out the champagne, add the fact that costs are running slightly below last year's level. Observers are looking for Stanley Leisure's profits to rise from pounds 8m to pounds 10m this year and pounds 12.5m next to drop the price- earnings ratio towards 15 and then about 12. The shares look excellent value on those projections.

There is also solid physical expansion in the business which has produced impressive growth over the years. Resilience in recession came from a combination of a hands-on management style and a bias, particularly with the betting shops, to the northern part of the country. The group has been built up by a series of mostly small acquisitions which have taken the number of betting shops from 326 to 355 in the past year and are likely to take the figure to 400 over the coming year. More of the casinos are in the South and cater for A and B socio-economic groups rather than the Cs and Ds who go to the betting shops. The shares look well worth buying for outperformance in the short and long term.

Glasgow-based Stakis, at 64p, is a different proposition to Stanley Leisure, with interests in hotels and mostly provincial casinos. The shares have been on a roller-coaster ride from a peak 130p in 1987 to a disastrous 20p last autumn. The latest rebound reflects a spectacular turn-round in the group's performance under a new management team. Helped by the sale of the nursing homes division and a rights issue, debts have been cut from a survival-threatening pounds 200m to pounds 117m. There has been a remarkable improvement in trading at the group's 30 hotels and 18 casinos, which has lifted operating profits from pounds 6.7m to pounds 11.2m for the six months to the beginning of April.

Analysts' forecasts for the full year have moved up from pounds 8.5m, against last year's loss of pounds 47.4m, to pounds 10.5m with pounds 18m pencilled in for 1993-94. The group is expected to go back on the acquisition trail shortly in what is still a buyers' market for hotels, which should keep profits and the share price heading higher.

Ladbroke, at 217.5p, has the dubious distinction of being possibly the highest yielding FT-SE 100 stock. A yield of more than 7 per cent is discounting the likelihood that its dividend will not be covered by expected profits and may be cut. But my guess is that once that threat is out of the way, even if the stock market's fears are realised, the only way for the shares will be up. Last year, Ladbroke's pounds 1bn plus of borrowings, large commercial property portfolio, exposure to a highly operationally geared international hotels business, and a DIY chain under threat from price wars and a collapsing housing market, were all negatives and the share price was in free fall.

But with sterling out of the ERM, perceptions are changing and Ladbroke is beginning the transformation from bear market basket-case to recovery play. It would not take much for the shares to take off. A safety-first strategy would be to buy one tranche of shares before the results and double up afterwards in case the figures are disappointing or there is a short-term blow to sentiment from a dividend cut.

(Photograph omitted)

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