Game on: Ken Turner of Sceptre Leisure talks to Stockopedia

Ken Turner arrives at his Preston headquarters at 6.30am every morning – perhaps a little later on a Saturday and Sunday. By 10am, each of his UK-wide network of depots has been issued with detailed information about their performance and left in little doubt about what’s expected of them. “This is a profits business,” says Turner. “Customer service is everything.”

For the chief executive of AIM listed gaming machine operator and pub supplies business Sceptre Leisure (LON:SCEL) , it is also about leading by example. Every year for the past 12 years his team has delivered growth in revenues and profits and this year was no different: sales up 9% to £42.8m and pre-tax profits up 37% to £1.9m. Turner puts the performance down to a string of factors, not least of which are the huge profits that can be made by increasingly buoyant pub groups from gaming machines on their premises. Likewise, passion, tight cost control and a close eye on the competition have been essential – as has a bullish attitude to buying and selling other businesses.

Sceptre was admitted to AIM in September 2008 following a reverse takeover involving Turner’s Orb Holdings with listed outfit GamingKing. The combined business brought together Sceptre, Lotteryking, Kelly’s Eye and Creative Lotteries. In June last year that portfolio was boosted by the addition of Australian 8 Ball on the south coast of England. It also saw the sale of a portfolio of fixed odds betting terminal (FOBT) machines ahead of expected tough new rules governing that sector. For Turner, the opportunities presented by a fragmented market mean that further acquisitions are a major focus – and some of them could be bigger than others…

Ken, you started this business 12 years ago and every year since then revenues and profits have increased. How have you done that?

We have a passion for the business. Every year has seen an increase in sales and profit margins. This year we have seen our revenue up over 9%, profit before tax up 37%, earnings per share up 15%, we have worked on gross margins and they are up nearly three points. You have got to keep working at a business, every business has its own dynamics but it is all about people at the end of the day – having quality people that get out there and run a business. You have also got to care for your customer and we really work hard for our customers. Machine income is quite an interesting business because for pubs, gaming machine income accounts for over 25% of the bottom line profit. It is a staggering amount of money so the pubs need machines and it has been a pretty recession proof business.

We have had pub closures but at the bottom end the pubs that cost us a lot of money – the ones that always open and close and are often found in the industrial heartlands – have really finished their trading format. Modern pubs are really quite good. People I know that have pub companies have seen there income grow by 20-30%. If you look at Punch Taverns (LON:PUB) shares and Enterprise Inns (LON:ETI) shares I think you will see them really start to motor in the not too distant future. If you looked at their earning previously there would be so much profit per pub – those profit per pub shares will be up massively as the tail of their estates come off. What happens in the industrial heartlands is that a pub is made up of 10 or 15 key locals that are in there all the time. When that pub closes those locals will simply decamp to the pub down the road.

In terms of our sector, we are right at the top end, we supply over half of the machines used by Mitchells & Butlers (LON:MAB) and over half of the machines used by Whitbread (LON:WTB) . We position ourselves to be a high quality machine operator. Numbers are important but it is really about profitability. We operate a service across the UK so if you placed a service call as a licensee we would be with you within around two hours. We answer all our phones with human beings, even with our service you go directly through to an operator that works for Sceptre. Management are contactable 24/7 and we have very strong KPIs that we work to. If you were running one of my depots by 10am you would know how the depot was performing regarding service and collections, and those are sent out every morning. Our customers also have that data.

In terms of ratios, 95% of our machines are on hire at any one time; we are a hire business so we make sure our assets are out where they should be, earning money, not in a warehouse. We have strict ratios of 130-plus machines rented per collector, 300 machines rented per engineer and as an entire business we operate 58 machines rented for every person employed. As we grow the business we grow in those ratios and as it shrinks in parts of the country we take people out in those ratios as well. So as the business moves we keep our staff ratios very strictly aligned. It is understanding those dynamics of the business which is really important.

What is the competitive environment like?

The largest company is called Gamestec, although we are almost equal first now. We have been growing over the last 12 year while they have been declining. But when you compare ratios we know for a fact that they operate 32 machines rented per person employed and their off-site stock is much higher than us. So their asset utilisation is around 65%. It is a business that you have got to work hard at and you have got to keep looking to keep it in shape.

You have acquired and sold businesses during the last 12 months – what is driving your strategy when it comes to buying and selling?

When we look to buy a business we look for the synergy benefits on where it fits for us. We have grown from the north into the south through the acquisition of Crown Leisure [in October 2007] but we had a weakness along the south coast. We were trying to operate Bournemouth from west London and Bristol and it was hard to give good service to our customers. By buying Australian 8 Ball in Bournemouth we could pull that business into ours very quickly and take out fairly significant costs. A business like that kicked out and Ebitda for us of nearly £750,000 in the first year. Selling the FOBT business was an interesting situation. We sold it for £3.75m because we were getting worried about fixed odds betting. We had about 800 machines and the assets were worth about £2.5m so we ended up with a profit of nearly £1m. But there is going to be a thing coming in soon called GPT, or gross profit tax, and that will affect that sector. There are also concerns over legislation because it is seen as one area of problem gaming. You have got betting shops on the high street that used to open for summer racing and they are now open for the fixed odds betting terminals – they take so much money. People can go in there and put £100 on red or £100 on a number, just like in a casino, and the Gaming Commission are edgy on that and they will review the price of play, so that will come down. Also, growing that business is quite difficult. We found a betting shop chain in the north of England that had started buying their own machine cabinets and then they started buying their own content to go in those cabinets and we were being pushed out anyway. So a profit of £1m and money to develop the rest of the business seemed like a good idea. In the recession it has been very hard getting asset finance for businesses so it really does give us a great big use of capital to get out there and grow the organisation.

What opportunities are there for further deals – which areas of the business would you seek to strengthen?

We are looking at several things at the moment and we may well announce a deal fairly shortly – similar to the Australian 8 Ball deal. There are 570 smaller operators that do not have the purchasing power and infrastructure to make it work and a lot of these guys are nervous because they can’t get funding for their businesses. We have got some opportunities lined up that are ready to roll now and I would expect one of those to be concluded soon and there are plenty of others to follow. We are still ambitious, we don’t want to necessarily be the biggest but we would like to be the best and we are getting there.

Your share price has fallen over the year – what are your views on that?

I’m disappointed. Our time of coming to market [September 2008] must have been one of the worst times of anybody. We never raised any money and we floated on the day that Lehman Brothers went bust. If you look at AIM stocks so many people have come off the market because there has not been the availability of funding. But I truly believe that things are getting better. We did a ‘walk round’ to see some of the shareholders and said: ‘the bottom line is that we said we would – and we did. Are you interested in us now?’ That has been very positively received. So things are moving forward and we have some great opportunities to really consolidate this market further and I think that staying on AIM is the important thing to do for us. The other thing is that there have been others in the past that have come in to this sector and haven’t done a particularly good job. We are the only listed machine company now and we are very hard to benchmark from that point of view. The last time a company was sold, Rank was bought by Gamestec and they paid 4.2x Ebitda, so if you look at our business and see that we kicked out an Ebitda of £13.8m and then you look at our net debt you soon work out that our shares are massively under-valued.

I think that we have got such an exciting business here that once people realise what we have done and they get to understand the full story I think that is going to be quite exciting. There are a lot of things that we are doing that, if they come off in the next few months, could really make people think. We wouldn’t rule out making a big acquisition, we’ve certainly got the appetite for it. As a business we have got all the systems in place, we have got a fabulous management team that can cope with sizeable deals and, given the way we run our ratios, we can actually make it work very quickly. When we bought Crown Leisure we converted that business, which was running at a loss, into a profit in four weeks.

Finally, how have things gone during the first half of the new year and what are your plans for the business going forward?

Things are in line with the way we thought they would be. The World Cup made things a bit slower than we would have liked. Overall, we have just picked up a contract with the Punch Pub Company for another 1,000 machines. We have just picked up a new chunk from Greene King (LON:GNK) and another regional brewer so we are doing well. A really interesting side of our business, which is quite low key, is that when we bought Lotteryking there were two other brands that we picked up, which were Kelly’s Eye and we have also developed a brand called Party House. We have got a whole new 200 page catalogue being launched into the licensed trade with all of the products – glassware, furniture, lottery fundraising, bingo, Sceptre. Potentially, it could be one of our biggest developments because the margins on it are very high. We supply around about 12,000 licensed retail outlets and we will spread the catalogue across our customer base. This is a sophisticated business and one that is very fast moving because of the dynamics and the amount of money that it earns our customers.

Thank you for talking to Stockopedia.

Thank you.