Smaller Companies: Stakis slimmer but not entirely fit

SHAREHOLDERS in Stakis, the hotels and casinos group, who have taken up their allocation in the pounds 28m rights issue are in the enviable position of sitting on a tidy profit of 40 per cent. The one- for-three cash call, which closes today, was pitched at 32p per share compared with Friday's closing price of 46p.

So the natural question is simply: should those who took up the rights take some, all or none of the profit? Shareholders could, after all, get something for nothing by selling about two thirds of their new shares, which would recoup the costs of taking up the rights.

But while there is no disputing that Stakis is still in the doldrums, it is over the worst and that kind of profit-taking would have to be construed to be extreme.

There have been clear signs since the rights was announced that institutions have become more supportive. One of the more pronounced indications was the ease with which Smith New Court managed to place a large part of the Stakis family's rights entitlement earlier this month.

That placing will ultimately lead to the family's holding falling from 24 to 18 per cent, and with it any lingering doubts that family control had not been completely exorcised from the system.

Changes at Stakis have been nothing short of dramatic, but it could have gone horribly wrong if original plans to sell the casinos side had succeeded. Stakis was lucky that there were no takers for the casinos, because the disposal would have robbed the company of a source of cash it needs to plough back into its hotels.

More sensibly, Stakis has sold its largely mature and capital-intensive nursing homes business. Cash from the casinos was never going to be sufficient to support both that operation and hotels.

In terms of tangible assets, Stakis is now a much slimmer outfit than a couple of years ago when the problems associated with the company's brainstorming property-buying policy of the Eighties came home to roost.

Slim it may be, but the company still has a lot to do to regain its fitness. The outlook for hotels in the UK remains tough, and prospects for casinos hinge on improvements in consumer spending. Stakis will also have its work cut out to sweat more out of its assets regardless of the business climate.

For its part the new management, fronted by Sir Lewis Robertson, the chairman, and David Michels, the chief executive, has identified and started to rectify many of the problems.

For instance, conference rooms are replacing surplus on-site hotel restaurants. And target marketing, aided by computerisation of membership lists, should prove beneficial for the casinos side.

Time is needed, and time is one commodity Stakis has. The rights, the disposal - even though it generated only a small profit - and fresh banking agreements have put it on a much firmer footing that many other leisure firms.

With that in mind, however, the company's recovery is going to be slow, and the immediate outlook for the share price performance is subdued. Shareholders, therefore, should consider taking some profits from the rights shares.