Stakis gambles on its machines

The Investment Column

The stock market's renewed love affair with hotels in the wake of Granada's takeover of Forte should have done no harm to Stakis, the Glasgow-based leisure group. Indeed, after marking time for two years, the shares have outperformed the rest of the market by 29 per cent since the start of 1996, even after yesterday's 3p fall to 108p.

But paradoxically, that leap had more to do with the prospects for the group's casinos arm, which had a turgid 1995, rather than hotels, whose sparkling performance helped to rescue last year's figures. Pre-tax profits just inched ahead 4 per cent to pounds 12m in the half-year to March, restrained by the gaming division. Stakis has been warning of problems there for some time, so, while disappointing, the profits slide from pounds 6.46m to pounds 5.05m came as little surprise. After an exceptionally good end to 1994, the punters appear to have gone to sleep for most of 1995, distracted in part perhaps by National Lottery scratch cards. But the group also seems to have taken its eye off the ball a little, with a pounds 2m hoist in branch costs taking a chunk out of profits.

Things have started to pick up since January, while Stakis has shown its determination to address the problems with Jim McCarvill, managing director of casinos, being dropped on Friday. The real bonanza will come, however, if the gaming machine proposals in the Government's green paper on deregulating the industry show any sign of becoming law. That could see the current limit of six slot-machines per outlet becoming one or two per table. The result could be an uplift of as much as 50 per cent to the profits of the business or anything between pounds 4m and pounds 6m.

Meanwhile, hotels are tanking ahead, with profits jumping from pounds 13m to pounds 17m in the latest half year. On the back of the current buoyancy in the market, the group is enjoying the virtuous circle of more bedrooms, higher occupancy and an increase in average room rates. The sum of those parts raised the yield per room by 13 per cent to pounds 32.61. At these levels, every extra point on the occupancy level, now 71 per cent, or pound on room rates pretty well falls through to the bottom line in the hotels division, which has the more prosperous second half to look forward to.

Stakis has achieved that rare feat of moving from recovery to growth without hiccup under chief executive David Michels. Despite the group's relative financial strength, he is moving with commendable caution in expanding the group, ruling out any acquisition of the Queens Moat assets currently up for sale. The expansion of the health clubs side through last month's pounds 20m LivingWell acquisition could prove an interesting higher growth area.

But a forward multiple of 17, based on profits of pounds 31m this year, suggests the shares are up with events. Hold.