Fool's Eye View

[ June 6, 2000 ]

Gambling on London Clubs

By Maynard Paton (TMFMayn)

Carburton Street, London -- Can you think of any better business to own than a casino? They should all be great money-spinners. I mean, where else do customers enter an establishment loaded with money, and then almost always leave with empty wallets after not actually having bought anything?

And not only do you find that casino clientele are always only too willing to part with their cash, those customers are not in short supply either. As you could expect with the popularity of other get-rich-quick "strategies", such as the National Lottery, betting on the horses and following those ever-dreadful penny share tipsheets, there ought to be no lack of enthusiastic casino gamblers hoping to make a quick buck. Overall, with the gaming odds always in their favour, owning a casino should be the equivalent of an investment "sure thing" if ever there was one. Well, that's the theory.

Missing the jackpot

But after the annual results released today from London Clubs International (LSE: LCI), perhaps running a casino isn't the great accounting bonanza that could be imagined. The figures released by the international casino operator were very unimpressive.

                     53 weeks to   52 weeks to
                     02/04/2000    28/03/1999


Turnover (£m)           144.7         143.7


Operating
profit (£m)              14.9          15.0


Net investment
income (£m)               7.1             -


Net interest
payable (£m)             (7.9)         (2.7)


Profit before
tax (£m)                 14.1          12.3


Earnings per share (p)    7.0           5.7

Turnover was stagnant due to the refurbishment and disposal of some of the group's gambling establishments, adding to the unspectacularly mixed performance in general. Slightly worrying for London Club's more affluent sites was the comment about their "high rollers". Domestic and international competition for these exclusive customers was described today as "fierce". Although Chairman Alan Goodenough continually referred to a 15% rise in profits, the bulk of the jump can be attributed to the proceeds from the sale of an old casino. This contribution counterbalances a very hefty interest bill, the financial payments increasing significantly due to expansion plans at London Clubs.

Expansion plans

Alongside ventures in South Africa, Egypt and the Bahamas, and developments in the less glamorous settings of Brighton and Southend, the group's jewel in the crown is to be the Aladdin casino in Las Vegas. With strong gaming growth throughout Las Vegas at the moment, London Clubs anticipate that the new US casino is "on course to be another 'must see' Strip attraction".

Net debt doubled to £130m in the period as £70m was expensed largely through expansion costs. Although the Aladdin casino has caused London Clubs to contribute a "greater level of investment than was originally intended", the company soothes nervous investors by declaring that the current financing arrangements are sufficient. Reassuring to hear, especially when interest payments are covered just twice by operating profits.

Internet scorn

London Clubs, unsurprisingly with their traditional casinos, are scathing over the current players evolving on new electronic media. "Current Internet gambling activities have led to a 'mish-mash' of products. We are not prepared to compromise our long-established international reputation... We see no merit therefore, in participating in precipitous fashion in a largely poor quality and unregulated melee" the group scornfully states.

In terms of an investment in London Clubs, I'm in agreement with this view from fullbreakfast.

"On the whole, I would say that I'd rather take my money round one of their casinos and punt the lot on Red than buy the actual shares..."

The whole future of the group appears to rest on the ambitious Aladdin project. UK companies generally don't have the greatest of track records when venturing in to the US, and London Clubs has placed a substantial stake on the table. With a huge debt mountain and miniscule interest cover, the slightest operating slip could be financially disastrous for the group. Until the performance of the new Aladdin casino can be determined, the odds are firmly stacked against London Clubs.

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