SHARES: Ladbroke can defy the odds

BACK IN February, this column advised investors that backing Ladbroke was at best a long shot. Tough times lay ahead in the hotel trade, but the main reason for our cautious stance was the likely impact of the on- line National Lottery.

It was early days then, the Lottery's effect on Ladbroke's 1,900 betting shops and Vernons pools operation still largely unknown. But the betting lobby was slow to respond to the competitive challenge posed by Lottery organisers Camelot and the pounds 60m-plus a week that was pouring into its coffers, much of it ostensibly for good causes. "The shares should be avoided until the picture clears," we warned.

In the event, the recommendation proved prescient, as things actually got a lot worse for the betting industry in general and Ladbroke in particular. Camelot launched instant-win scratch-cards a month later and they soon took another pounds 40m from the leisure spending pool. Some punters even had the audacity to buy the pound-a-go "Instants" cards in a newsagent, walk into a nearby betting shop and scratch away furiously in the very place that was being denied their loose change.

Not surprisingly, Ladbroke felt the pain. Jobs went at both the Ladbroke racing and Vernons pools operations, while profits in the gaming division slumped by just under a quarter to pounds 37.4m in the first half. The shares suffered accordingly, falling a ha'penny since our tip and underperforming a rising stock market by 14 per cent in the process.

Now as the first anniversary of the National Lottery approaches, it appears gaming fortunes may be about to turn the corner. Sales of scratch-cards have declined from about pounds 40m a week to around pounds 30m. The hot, dry summer, which played havoc with the betting business as owners kept racehorses away from rock-hard tracks, has given way to wetter weather, at least in Southern England, making the big autumn handicaps as competitive - and profitable for the bookies - as ever.

And having at one stage shut all its shops on the Sabbath because of low turnover, Ladbroke is now making more positive noises about Sunday racing.

Not that Ladbroke is shouting all this from the top of the nearest grandstand. If anything, prospects are being played down, and with good reason. For Ladbroke is lobbying the Government to reduce betting duty from 7.75 per cent to 5.75 per cent in the November Budget to help offset the impact of the Lottery, and it wants to be allowed to put fruit machines in its betting shops. Success on either front should encourage a positive share price reaction.

Away from gaming, Ladbroke's hotel activities, namely Hilton International outside the US, go from strength to strength. Interim results were ahead of expectations with occupancy rates in UK hotels - half of the division's profits - up from 67 per cent to 74 per cent, while room rates were 5 per cent higher.

The big unknown is the structure of any potential deal to unite the Hilton hotel chain with the group that owns the brand name in the US. The fear is any attempt to buy the hotel division of Hilton Hotels Corporation, which is currently being demerged from its gaming business, is likely to mean Ladbroke issuing shares to fund the deal. More cautious investors might wait and see what terms are offered, though the benefits to Ladbroke of having a global brand name like Hilton would be considerable.

In the meantime, unwinding the property portfolio and selling off some prestige hotels should keep debt down to manageable levels. Indeed, analysts expect around pounds 400m to be raised this year, cutting the debt burden to less than pounds 1bn, while gearing of 72 per cent could be cut by half within 18 months. Certainly, the pounds 290m sale of the Texas DIY chain to the supermarket giant J Sainbury inspires confidence in the group's wheeling and dealing, even if the final terms of the deal have yet to be finalised.

Ladbroke has performed less well than its blue-chip peers for longer than shareholders care to remember, although the stock has shown resilience at the 150p-160p level.

More speculative-minded investors might dwell on the fact that sentiment towards shares in such diversified leisure groups as Ladbroke takes a long time to change, but when it does the turnaround can be quite dramatic. One need only look at what happened to such companies as Granada and, more recently, Thorn EMI when they finally got their act together. Don't be surprised if Ladbroke, too, puts years of disappointing form behind it and defies the odds. Buy.

Ladbroke

Share price 168p Prospective yield 4.5% Prospective price-earnings ratio 19 Dividend cover 1.5 1993 1994 1995*

Sales pounds 4.27bn pounds 4.36bn pounds 3.75bn Pre-tax profits pounds 107m pounds 129m pounds 150m Earnings per share 6.17p 7.29p 8.75p Dividend per share 6p 6p 6p

* NatWest forecast