The Investment Column: Odds stacked against Stanley

HIGH STREET betting is not the UK's raciest market, and Stanley Leisure is one of the smallest players in the business. Being a small player in a market that is mature and unpredictable does not sound an attractive investment proposition.

But Stanley has its attractions. Although earnings from gambling are - of course - hard to predict, Stanley is a solid company which was able to deliver an 8 per cent hike in the dividend yesterday despite suffering a fall in profits. And while Stanley may be stuck for organic growth in the high street, its relatively small size means it has more to gain by making acquisitions because the benefits of scale economies are higher.

The group has been expanding by acquisition with vigour and Bob Wiper, its new chief executive, says he is in advanced discussions over the purchase of several provincial businesses. Last year, the group's sites tipped above the 600 mark with the addition of a further 52. The privatisation of the Tote, which has 275 shops, would present Stanley with quite an opportunity.

Stanley doesn't mess around, either. Since assuming control of Capital Corporation, the London casino business comprising Crockfords, the Colony Club and the Mint, in May it has closed the head office and achieved a pounds 3m annual cost saving. But opportunities to acquire casinos are few and far between.

Growth in the betting shops will come from Stanley offering a wider range of gambling opportunities. Its Numbers game, similar to the lottery, has not been a success, however. Growth in casinos is expected to come from a forthcoming relaxation of rules governing the maximum jackpot in slot machines.

Not surprisingly, Stanley is now looking to pull in new punters through the Internet, interactive television, and the exploitation of its off- shore licence. Telebetting alone is a pounds 1bn market; Stanley is after at least a 5 per cent share.

In the meantime, the core businesses remain unpredictable. Sales rose only slightly but profits fell last year as the unexpected outcome of football leagues in the second half of the year offset pounds 1.3m of profits attributable to the World Cup. So while the group is reporting record racing sales - bets and casino spend per head are up more than inflation; margins have recovered - investors should not expect Stanley's luck to continue.

Analysts expect pre-tax profits of around pounds 28m and earnings of 17.6p per share this year, putting the shares, which closed up 6p at 276p yesterday, on a forward price-earnings ratio of 16. Given the volatility of the current portfolio, the shares are looking fully valued.