Investment Column: Rank still has reason to cheer although Gambling Act was a disappointment

Scotty is burning through too much cash and there is no reason to hang on - Wyevale's Easter sales come up smelling of roses

For five years investors in gaming companies have been punting on whether or not the Government will sweep away Britain's arcane gambling laws and allow enormous growth potential for the industry. We finally now have a new Gambling Act, but it contains ups and downs for all involved.

For five years investors in gaming companies have been punting on whether or not the Government will sweep away Britain's arcane gambling laws and allow enormous growth potential for the industry. We finally now have a new Gambling Act, but it contains ups and downs for all involved.

British casino companies such as Rank, which runs the Grosvenor chain and Mecca bingo halls, at one point faced the prospect of Las Vegas gaming companies bringing supersized gambling sheds to the UK. But following the pre-election political wash-up, only one super-casino will be allowed, so the competitive threat has all but vanished.

It has not gone entirely Rank's way, however. The Bill was originally going to allow existing operators to expand their bingo halls and casinos, increase slot machines from 10 to 150, build new venues and combine bingo halls with casinos. But as part of the last-minute political compromise, these opportunities have gone.

So what is there really to cheer? In a trading statement yesterday, Rank said recent trading in its bingo and casinos had been disappointing and it did not expect any rewards from the new law this year.

But this outlook is a little too negative. Election results providing, legislation will soon be in place to allow casino advertising for the first time and axe the 24-hour rule which insists new customers must be a member for a day before they play. Slot machines numbers can also now be doubled to 20. These changes will provide a huge boost for Rank, which already has strong brands in a world where gambling is becoming a mainstream leisure activity.

Rank's Hard Rock, the music memorabilia café and merchandising chain, is also improving, having suffered while American tourists stayed at home. Further expansion is taking place mainly in the US in hotel and casino developments. Done through franchising, this is a cheap way of growing the brand.

The biggest uncertainty for Rank is its film and media division, Deluxe, a drag on profits for some time. Its media division, which makes VHS tapes, has struggled to adapt to the rise of DVDs and is now up for sale. The film processing unit is being demerged, but this is a complex transaction, involving tangled long-term contracts, and there is no sign of it being completed soon.

Rank shares trade at about 13 times 2005 earnings, and yields an impressive 6 per cent dividend. Hold on to the shares for the payout, the casino prospects and the hope of a Deluxe exit.

Scotty is burning through too much cash and there is no reason to hang on

Scotty is travelling at warp speed in the wrong direction. The German military communications group merged with disaster-prone videophones company Motion Media last year, but had to slash the share price by two-thirds to raise £5m needed for working capital. The stock has halved again since, and fell 0.25p to 1.875p yesterday.

Why? The main reason is that Scotty has already run out of money, and is issuing a steady drip-drip of shares to keep the enterprise running.

The pre-tax loss for the six months to 31 January was £2.5m. Scotty has already once missed its sales targets and failed to publish its previous results in time, so investors are sceptical of its promises of sustainable profitability from this summer.

Recent sales of its video communications hardware have been to the Royal Navy and for the German airforce's Eurocopter. The latter project is still at trial stage, as are the healthcare sales in the Netherlands, which is using Scotty technology to test home diagnosis by videophone.

The Scotty product suite is wide and needs constant development for what currently look like only small orders. Bulls hope it will hit upon a mass market or a high margin specialist product, but with its financial position so perilous, there seems no compelling reason to cling on.

Wyevale's Easter sales come up smelling of roses

The contrast with B&Q's terrible sales figures was stark. Wyevale Garden Centres, with 114 stores across England and Wales, has had a stonking Easter. No excuses about a cold snap or failing consumer confidence. The company has made efforts to improve the look and feel of its centres, stimulating customers to buy more.

Which they are doing in spades. Like-for-like sales for the 16 weeks to 24 April were up 11 per cent on the same period last year (and the comparison is not against a weak 2004, either, because sales growth then was more than 9 per cent).

David Williams, the new chairman, believes more can be achieved with investment in upgrading the centres, and has begun a review of the business that will report in September. As well as looking at every detail of the operations, he is also reviewing the value of the property portfolio (currently 292p a share at prices originally paid, now out of date).

This strategy review has encouraged some hot money into shares, with Jack Petchey, the property speculator, and the hedge fund Laxey Partners building large stakes. If they are hoping for a big bang, with dramatic plans to sell off land for redevelopment, they are likely to be disappointed, but there is plenty still to go for from churning the portfolio and investing in the centres.

For the immediate future, investors must look to the heavens. If they open, the peak selling season for gardening products could be a washout. The long-term forecast for Wyevale shares, however, is resolutely sunny. At 485p, buy.