The future is still a lottery for Stanley; The Investment Column

The gaming industry is in such a state of flux currently that valuing companies such as Stanley Leisure requires some pretty heroic assumptions about future developments. Next month, for example, Camelot introduces a mid-week lottery while deregulation of casinos, putting more slot machines alongside the tables and licensing 20 new regions around the country, is set to happen but the timing is unclear.

Add in the prospect of a change of government, most likely to a party for which gaming reform is pretty low down its list of priorities, and the outlook is at best uncertain. The long-term picture, however, remains attractive.

Stanley's betting shops are a good example of the extent to which the industry has been prodded by the National Lottery into creating a better quality earnings stream. Thirty years ago the harsh winter of 1963 effectively shut down the country's betting shops because there was no racing. Now bookies take bets on four televised football matches a week, the Irish lottery and a new rival to the Nation Lottery called 49s. It is a much better balanced business and even within the 72 per cent of turnover represented by racing, all-weather tracks have made meetings more reliable.

Even diversification, however, cannot be expected to protect against a 25,000 to one long-shot like Frankie Dettori's clean sweep at Ascot last year. Stanley's pounds 2m hit on that day in effect wiped out profits at its new Gus Carter acquisition and pegged the pre-tax profits rise for the six months to October to 21 per cent.

Profits before tax moved ahead from pounds 6.2m to pounds 7.4m, pushing earnings per share from 3.76p to 4.51p. That meant Stanley was able to recommend a 20 per cent rise in the interim dividend. These were impressive figures but analysts still managed to find one or two niggling worries.

Analysts' biggest concern lay in evidence of margin pressure in both the bookies and casinos, where punters are said to be getting better at beating the house, by fair means and foul. Better training is expected to give staff a sharper eye and improve Stanley's return. There were also worries about a pretty anaemic 3 per cent rise in sales from the betting shop arm. The success of betting on the Irish lottery might have been expected to boost turnover by more than inflation.

Still, most brokers were talking about raising their forecasts yesterday and a full-year outcome of about pounds 23m now looks likely. That would put the shares, up 17.5p to 294p yesterday, on a prospective price-earnings ratio of 22. It is right the shares should trade at a premium to the market, to reflect the benefits of deregulation to come, but with so many question marks over the company as well that rating is high enough.