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Stanley Leisure looks ready for the off

Diageo; London Bridge

Friday 13 July 2001 00:00 BST
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Stanley Leisure plays a mean hand from a poor deal. The bookies and casino group emerged healthy despite a year plagued by high rollers, record race meeting cancellations and favourites winning at the Euro 2000 football championship.

The stock has proved a canny investment in recent months, nearly doubling from a year low and up 4.5p at 288.5p yesterday. There is further upside, not least from the Government's pair of deregulation gifts for the industry. The advent of a new taxation regime from this autumn, coupled with the expected liberalisation following the Budd report – which should be published next week – makes soaring industry profits an odds-on favourite.

Turnover in the betting division impressed analysts poring over full-year figures yesterday. Sales grew 6 per cent to £480m, despite the loss of around £30,000 of revenues at each of its 638 betting shops because of 221 race meetings lost to foot-and-mouth.

A whacking £4.7m loss from the group's forays into e-commerce meant Stanley came home with a 12 per cent fall in pre-tax profits for the year to April, down to £25.1m. It chose to write off all its online investment – including setting up and repatriation costs of around £3m – in one lump. The group is relocating its sports betting internet site back home from Malta, following the abolition of betting duty.

Stanley admitted that operating profit in the gaming division was "at least £3m less than expected" after nameless punters left the group's Crockford casino clinging on to its shirt. Coming at the tail end of the financial year, this prompted a March trading warning, although the group insisted the losses were nothing unusual. A win in the war of gaming staff attrition and longer opening hours to 6am leave Stanley well poised to maximise any advantages from Budd.

The question mark over the future is Stanley's designs on Coral, the betting shop chain. Here, prudence should win out and Leonard Steinberg, the chairman, is trusted to act only if the deal would be quickly earnings enhancing.

Brewin Dolphin, the broker, expects Stanley's pre-tax profits to soar to £33m this year, which will give an earnings per share of 19p, up from 14.2p this year. Analysts forecast steady growth and say estimates could be revised higher if Budd proves to be especially favourable. On a forward price-earnings ratio of 15, and given the lack of direct peers, the shares are a buy.

Diageo

Given the performance of its food divisions, it is no wonder Diageo has turned to drink. The beer and spirits giant is trying to offload Burger King, its ubiquitous fast food chain, and Pillsbury, maker of Jolly Green Giant produce. The trouble is, Diageo can't get shot of either of them fast enough.

Burger King is still on the books, like-for-like sales running an estimated 2 per cent lower than last year, with no sign of a deal to sell the business to a financial buyer. In a trading update yesterday, Diageo warned it would absorb an additional £50m in restructuring charges, as it struggles to persuade franchisees to give their burger bars a make-over

There was disappointment, too, at Pillsbury, where the prolonged delay over its disposal is said to have sapped morale and held up the new product launches that are essential to growth. Its top line growth is just 2 per cent, compared to 6 per cent at General Mills, the US food giant with which it will be merged. Diageo will get £7bn of General Mills stock when the deal is finally approved by US regulators, but quibbling over forced disposals could go on all summer. Until that happens, Pillsbury's revenue growth withers and the costs of hanging on to good staff are mushrooming.

The Guinness drinks business is continuing to deliver strong trading, Diageo confirmed yesterday, driven by heavy marketing of trendy brands like Smirnoff Ice. A consumer downturn in Asia is an increasing risk risk, though.

Analysts' expectations for a £500m rise in profits to £2.0bn this year are in the price. Down 21p to 744p, the stock is a forward p/e of 18 and is a sell.

London Bridge

It has been the easy joke of the New Economy: London Bridge Software is falling down. The company makes financial software, mainly for retail banks, and has seen its shares collapse from more than £15 in March 2000 to less than a tenth of that as analysts' growth forecasts proved impossibly optimistic.

Yesterday, though, it said it will meet consensus forecasts when it reports interim figures next month, sending shares up 16p to 129.5p. Revenues will be around £36m, up from £27.2m a year ago and from £29.5m in the previous half. Profits of £5m to £5.5m will be marginally lower year-on-year.

Interestingly, its debt collection software is attracting interest from the cash-strapped telecoms operators. Phoenix, its new acquisition, is helping lucrative cross-selling, too.

It is a bit early to rebuild the buy case for London Bridge. Trading conditions, by its own admission, continue to be difficult and its fortunes cannot be revived until there is a rebound in business confidence in the economic outlook. But when that starts to happen, London Bridge, now on a more realistic forward price-earnings ratio of 19, is one to watch.

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