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Casino operators big and small could hit the jackpot when the Government's radical gaming proposals become law. James Crux identifies the stocks on which to place your chips

A legislative revolution is sweeping through the gaming industry. For decades, Government policy has focused on bringing gambling under strict control – to limit casino, betting shop and bingo hall numbers to merely satisfy 'un-stimulated' demand.

But a new set of proposals, contained within last year's Government White Paper, 'A safe bet for success' (itself a response to Sir Alan Budd's independent 2001 report) will radically de-regulate the industry.

In a nutshell, this paper proposed establishing a single regulator for all operators (the Gambling Commission). It also backed the notion of non-membership casinos (at present you have to apply and wait 24 hours before becoming a member) and argued for the ending of restrictions as to where a casino could be opened. Most surprisingly, the paper supported the concept of unlimited jackpot slot machines and an increase in the number of slot machines allowed.

Casinos to cash in

A Merrill Lynch report – 'New British Gambling – Where were you when 'Budd' was published?, predicts that abolition of the 24-hour rule and more extensive casino advertising will result in 'significant growth in casino visitation numbers'.

Above all else, however, the broker places greatest emphasis on the impact of the linked slot machines concept – the number of slot machines per casino could rise from (say) around ten machines to eighty.

Overall, Merrrill Lynch says the 'net result of these assumptions is a short threefold increase in forecast EBIT for a hypothetical provincial casino operator'.

The Government's review suggests a ratio of eight slot machines per casino gaming table with no upper limit when a casino offers more than eighty gaming tables. The linking of slot machines through an established operator's casino estate dramatically boosts the possible jackpot, luring in more punters.

The French Experience

As you can imagine, casino operators are licking their lips and rightly so, given the explosive growth seen in the French casino market in the late 1980s after changes in the law. In a five-year time frame following the introduction of changes, the French industry achieved a fourfold increase.

Some analysts suggest that the UK changes, which could be in force by 2005, might increase the number of casinos from the current 123 to around 1500. Slot machines might number 100,000!

Players to back

Backing this sector before the explosive growth (and the attendant takeover feeding frenzy) is complete is obviously a very alluring policy – and there is a lot for budding investors to choose from.

Recently resisted by its smaller rival London Clubs International, Stanley Leisure is the biggest casino operator in Great Britain with 37 provincial casinos and three in London. Recent interim figures to 27 October were excellent (the group's best ever half time figures) with pre-tax profits powering ahead 58 per cent to £23.8 million on a 30 per cent sales hike to £473.1 million. Sales in the gaming division alone rose 30 per cent to £91.5 million. Casinos drove up the figures with the London casinos in particular delivering a stellar performance.

Intriguingly, Stanley Leisure has obtained a licence for the largest casino in the country at the Star City development site near Birmingham. Thanks to the Gambling Review recommendations, business will be boosted by a betting facility that will be provided on the premises.

Following the interim announcement, analysts at UBS Warburg pencilled in profits of £48 million for the full year, for earnings of 25.36p, with £51 million and 26.84p shaded in for 2004. The shares trade on 13.9 times forecast earnings for 2003, falling to 13.13 for 2004. On this rating, Stanley looks nicely set up for the de-regulated era.

LCI looking good

Since last August fledgling, London Clubs International has been providing live entertainment and alcohol on its gaming floors. In the half to September, the company made profits before exceptional items and tax of £2.6 million, compared to a £14.7 million loss, as the London casinos yielded better win percentages and outstanding debts fell.

Though Middle Eastern players stayed away from its London casinos, its Middle East casinos benefited as residents stayed at home rather than travel abroad. Intriguingly, its latest casinos at Southend and Brighton are being buoyed by a relaxation in regulations, including the introduction of live entertainment. This may provide the template for future openings when deregulation kicks in.

Subject to a recent indicative approach at 25p a share from rival Stanley Leisure, the shares are currently changing hands for 20p, valuing the business at £29.48 million. Stanley Leisure withdrew an indicative offer (after it realised it couldn't meet a takeover panel deadline) and cannot bid for six months, but on a forward rating of just 5.4 times, the shares have a value feel to them, with or without bid activity.

Rank leader

It would be injudicious not to mention Rank Group, the massive market leader in bingo and casinos. Owner of Mecca bingo halls and Grosvenor casinos as well as an internet betting arm, it has bought loss-making phone and web betting business Blue Square for £65 million. Chief executive Mike Smith says calendar 2002 figures will hit consensus forecasts of a £200 million profit for earnings of 19.17p when they are published in February. At 234p, the shares are rated on a mere 12.2 times forecast earnings – attractive given that the Blue Square deal sets Rank up as the only mainstream gaming company able to offer a 'full suite of gaming products: betting, bingo and casino games'.

Attractive AIM punts

Formerly cash shell XS Leisure, Top Ten boosted its bingo club numbers to sixteen after acquiring the five-strong Welcome Social Clubs for £3.15 million. Interims to 29 September showed pre-tax profits of £268,000 on turnover of £3.7 million. Bingo-specific benefits emerging from the Government proposals include the abolition of demand tests and the rule requiring membership at least 24 hours before playing – bingo clubs will also be allowed to mix jackpot and other gaming machines, all factors that should buoy prospects at Top Ten.

Serial entrepreneur Russell Stevens, the man behind Aim-quoted Meriden and investment play Bidtimes, has helped steer Blue Chip Casinos for the past couple of years (it's a private venture but Bidtimes has taken a stake). 'We are basically building a chain of medium-sized casino halls around the provinces' he says. Blue Chip has one casino up and running and three 'in process that should open in the next twelve months'.

'When the change comes we'll be very well placed. It's a game with huge barriers to entry and could prove very profitable. We've been approached a few times but its not the time to sell.'