Expecting better at First Leisure

THE INVESTMENT COLUMN

First Leisure's shares have been in limbo for the past year, constrained in part by the unpredictability of the strength of the recovery on discretionary spending by consumers. Things, however, may be about to change, with evidence emerging that underlying trading is improving and news that the group is ready to accelerate its development programme.

Yesterday's announcement of a 24.6 per cent rise in taxable profits to pounds 17.2m for the six months to 30 April was principally fuelled by the company's discos. Profits from discos rose 24 per cent to pounds 10.5m.

Attendances are rising, aided by some smart mid-week marketing of student- only and over-25 nights. There has also been scope to raise weekend admission prices, although the spend per head on drinks remains stubbornly static. Two discos were opened, three more are in the pipeline and the hunt is on for at least another 20 sites.

Profits in the fledgling bingo division fell 13 per cent to pounds 1.3m due to high start-up costs, mainly resulting from heavy pre-opening marketing expenditure. The division is a cash cow in the making, however, and five more purpose-built clubs will open next year.

Piggy in the middle is ten-pin bowling. This leisure-cum-sport pursuit may have fared better, helping the sports division raise profits 17 per cent to pounds 7.6m, but its repositioning in the market is not yet complete. The emphasis is now on selling bowling as part of a multi-leisure centre. Resorts produced an unchanged profit of pounds 1.1m in the seasonally less favourable first half. The key summer season last year produced pounds 11.8m of profits. Health and fitness, an area that the company only moved into last year, is also being earmarked for a reasonable share of the increase in capital spending. The club in Berkshire will soon be followed by another in Bournemouth.

Total capital spending this year will rise from pounds 35m to pounds 50m. The development plans are also backed by pounds 100m of banking facilities, and strong cash flow should ensure that gearing does not rise too far above the half-year figure of 19 per cent.

Group profits this year should climb from pounds 37.5m to pounds 41.5m. At 303p, the shares look pricey on a forward p/e of 16.7 and a gross yield of 3.1 per cent, assuming dividends rise from 7.02p to 7.5p. Hold for the longer term.