The Investment column: Healthy Stakis well worth a gamble

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The Independent Online
Stakis could hardly make life easier for the analysts whose job it is to come up with forecasts of its profits. Yesterday's fourth-quarter trading statement from the casinos, hotels and health club group provided a wealth of detail about its main divisions, culminating in a turnover figure for each one.

What the company refused to say, however, was what everyone really wanted to hear - whether it was about to launch a pounds 300m bid for Lonrho's Metropole hotels.

The figures confirmed a benign trading background for the hotels operation, better-than-feared results from casinos and a good start for the embryonic health clubs. Glasgow-based Stakis, whose shares have been on a worrying downward slide for much of the year, is enjoying better conditions than for many months and yesterday the stock perked up 2.5p to close at 99.5p in response.

The hotels side, mainly in the provinces and with a heavy weighting towards Scotland, saw occupancy in the final quarter of the year rise an impressive 4.7 percentage points to 84.3 per cent, dragging the average for the year as a whole to 76.3 per cent, up from 72.1 per cent in the year to September 1995. Coupled with a higher average rate of pounds 47.16 per room (pounds 45.06), the yield per available room jumped from pounds 35.87 to pounds 39.76.

Those figures confirmed the forecasts made earlier in the year that 1996 would be another boom year for the British hotel industry as tourist numbers and business travel continued the impressive growth recorded in 1995.

Despite the unexpected shelving of the planned flotation earlier this week of Principal Hotels, the business is enjoying better trading than at any time since the mid-1980s and analysts are convinced that the good times will continue to roll for at least another couple of years.

Driving that uptick in the sector's fortunes has been an increasing imbalance between rising demand for rooms and supply which, after years during which no new hotels have been built, has failed to keep up. Simple laws of economics have dictated the inevitable result of that imbalance - higher prices.

The casinos division, on the other hand, has been the cause of increasing exasperation among investors this year as the problems that have dogged the division over the past couple of years, mainly down to the success of the National Lottery, have shown little sign of being cleared up. At first glance the final quarter showed a continuation of the same, with spend per head down from pounds 128 to pounds 116, wiping out the benefit of higher attendances.

But analysts took heart from the figures, suggesting that, stripping out unusual contributions from the Barracuda and Gibraltar, casinos painted a healthier underlying picture than for many a quarter.

The casinos division is also set for a trading fillip as deregulation of the industry takes hold and silly historic restrictions on the industry, such as not being able to advertise or let people play before they have gone through a tedious 48-hour membership qualification, head for the dustbin.

The final division, small by group standards, has taken Stakis into health and leisure operations via the pounds 20m acquisition of the LivingWell chain of clubs. This is a fast-growing market and a sensible diversification for a hotel company.

Stakis's shares have been a stunning performer since the dark days of 1992 when they bottomed out at 21p, shortly after the appointment of chief executive David Michels.

The sale of its nursing home operation in January 1993 was the catalyst for rapid growth in the share price and they had another burst of activity at the beginning of this year in anticipation of the benefits of casino deregulation. Since the early summer, however, they have been drifting.

On the basis of forecast profits this year of pounds 29.5m and pounds 36.8m next time, the shares stand on a prospective price/earnings ratio of 17, falling to 15. Given the growth potential in all three of its divisions, and the expectation that any Metropole deal will be earnings enhancing, that does not look demanding. Good value.

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