Stakis bet and breakfast good value
The Investment Column
Yesterday's first-quarter trading statement was therefore seized on as a further opportunity for the market to continue the catch-up of the past few weeks. The shares closed 4p higher at 105.5p, usefully ahead of the 87p low reached in November.
The market chose to focus on an apparent turnaround at the troubled casinos division, where attendances in the three months to December jumped from 525,000 to 603,000, even if those punters were concentrating more on the machines than the tables and so spending less. Stakis's win percentage is also low by industry standards and winning customers back after the ill-conceived imposition of membership charges a couple of years ago has only been achieved with a higher cost base.
Still, the outlook for the gaming arm remains good in the long run. Deregulation, when it comes, will lift the number of amusement machines allowed in casinos, reduce membership restrictions and send the business down the more populist Las Vegas route, where 90 per cent of revenues come through machines, generating much more predictable earnings streams.
In hotels, stripping out the closure during the period of the Stakis Tyneside's 147 rooms meant occupancy was stable at just over 72 per cent and the room rate pushed up nicely from pounds 45.58 to pounds 50.10. The Metropole hotels were only in for six weeks so the jury remains out on whether Stakis overpaid for them. Certainly the potential for improvement is there, with occupancy outside London a meagre 55 per cent, but a price tag of pounds 327m for operating profits of pounds 22.9m means the pressure is on Stakis to wring out cost savings and boost guest numbers.
These caveats aside, the long-term outlook for Stakis remains strong. Deregulation should transform casinos into a mainstream, highly profitable and cash-generative leisure activity. In hotels, there looks to be plenty still to go for in the current trading cycle, with demand set to carry on growing and little new capacity to cope with those extra numbers. Demographic changes make the weekend leisure business an increasingly attractive opportunity.
On the basis of pre-tax profits to next September of about pounds 59m, the shares trade on a prospective price-earnings ratio of 15. That is not much more than a market rating, which compares with the much higher multiples given to other companies. There is great scope in this business for small increases in achieved yield per room to translate into bigger increases in profits. With the outlook set fair for the rest of this year, the shares are good value.
Watson & Philip serves up a treat
Shares in Watson & Philip, the Dundee-based convenience store to food distribution group, seem to have been somewhat unfairly treated since a mild profit warning in October. Down from 466p, they recovered a chunky 50p to 392.5p yesterday on figures in line with the bottom end of previous market expectations.
If October's hiccup had never happened, news of an 11 per cent rise in pre-tax profits to pounds 20.1m on sales 16 per cent ahead at pounds 577m for the year to 27 October would surely have been well received.
They would also have made for a smoother transition for the new chief executive, Colin Glass, who was appointed from Dixons in the autumn.
But Watson has a good story to tell. The group has made a decent fist of moving out of cash and carry, a declining market, and into the more interesting areas of convenience stores and "food service".
The former, trading under the Alldays fascia, is now the core of the group, raising profits by a quarter to pounds 15.1m last year. The growth is coming from new store openings and raised margins, rather than organically, where an underlying like-for-like sales increase of 2.2 per cent looks pedestrian against the supermarkets. Driven by a novel equity-linked agreement for franchisees, Watson opened a net 89 stores last year and is planning another 150 in the current period, including 50 on Total petrol forecourts.
Operating margins, already up from 4.9 per cent to 5.4 per cent, have further to go as Alldays drives out low value-added groceries and household goods in favour of a range of convenience areas. Video rental, pizzas, Dunkin' Donuts franchises and dry- cleaning are all being trialled or rolled out in parts of the 526-strong chain. Sales are running ahead of last year.
More exciting perhaps is food service, supplying food for restaurants, hotels and the like, which jacked up profits 19 per cent to pounds 4.03m on like-for-like sales up by a fifth for the third year running. Third-biggest with a 4 per cent share of the market, W&P Foodservice should have plenty of room to grow as customers demand a more comprehensive national service.
Group profits of pounds 24m this year, for a prospective multiple of 10, make the shares look good value.
JD Sports has impressive form
John David Sports may have been priced at the top end of expectations when it came to the market in October, but the sports retailer has more than justified the rating. Priced at 285p, the shares shot to a high of 346p within two months and have only recently come off their peak.
The driver of this success and of others such as JJB Sports and Blacks Leisure has been the spectacular growth of the branded sports goods market. Here in the fashion-conscious world of the younger generation, brands such as Nike, Reebok and Fila are the "must have" accessories.
JD Sports continued the impressive form with its maiden set of results yesterday. Pre-tax profits in the six months to 30 September were in line with expectations at pounds 4.35m. This was after an exceptional charge of pounds 650,000 incurred as a result of the Manchester bomb which damaged four of JD's stores.
Like-for-like sales growth was strong in the half at 19 per cent. However, current trading has eased back to growth of 9 per cent in the 13 weeks to 31 December. Footwear went off the boil but was more than made up for by a good performance from clothing.
The rapid roll-out of the chain continues with 16 new stores opened in the first half and a further 13 opened since. One surprise was the shift to opening some stores out of town.
The nastier surprise came earlier this week when the OFT said it planned to investigate sports equipment suppliers which prevented retailers from discounting their products.
Though this could destabilise the sector, JJB has already said it does not expect to be affected by the investigation. JD Sports says that only a small proportion of its sales are of sports equipment so the impact should be even less. Even so, the shares shaded another 3.5p lower to 321.5p.
On MeesPierson's full-year forecast of pounds 9m, JD Sports shares trade on a forward rating of 24 - high enough.
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