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Rank Group^ (RNK, Buy at 82p) - Eyes down for a full house?
Rank Group Plc
The best is yet to come – We reiterate our Buy recommendation and 110p target price, but believe this will be a staging post to higher valuations as the investment-driven upgrade cycle continues and the full potential of casino modernisation becomes apparent.
Rank Group^ (RNK, Buy at 90p) - Strong H1; upgrades and casino assumtions raised
Rank is delivering on the promise of transformation – which began in 2018 and was stalled by the pandemic. Another underlying upgrade today is encouraging, ahead of the expected modernisation of casino regulation. We reiterate our Buy rating, with an increased target price of 110p.
“Customers clearly enjoying the improvements,” noted the CEO in Rank’s 1Q25 trading update. The company has been investing in its venues and its digital infrastructure, and this has clearly been paying off. We expect more of the same and reiterate our Buy recommendation and 100p target price.
Rank Group^ (RNK, Buy at 89p) - Q1 trumps Reeves!
More casino gaming machines on the horizon – We believe Rank’s casinos are to be permitted more gaming machines in FY26, which should result in material upside. In the meantime, the Budget’s net negative impact has to be absorbed. We reiterate Buy, TP 100p.
Rank Group^ (RNK, Buy at 88p) - Q1 NGR +12%; recovery builds
Aided somewhat by good margins and strong summer tourism, Grosvenor venues have traded close to pre-pandemic levels. Grosvenor and Mecca online are reporting revenue growth of over 20% YoY. Post Budget, we can assess the implications for forecasts. We reiterate Buy, TP 100p.
Still recovering – Rank’s venues businesses have taken longer than we expected to restore momentum following the pandemic. However, improved product, processes and service are clearly delivering that growth now in this highly operationally leveraged business. We reiterate our Buy recommendation and 100p TP.
Rank Group^ (RNK, Buy at 80p) - Momentum building to£100m+ EBIT
Rank Group^ (RNK, Buy at 70p) - FY outturn ahead of forecast; momentum building into FY25F
Solid start to FY25 – 10% revenue growth for first six weeks. This is up against a strong start to FY24, when growth was up 16% YoY. Our forecasts exclude upside from regulatory change, but even so, the current valuation is attractive in our view. We reiterate Buy and our 100p target price.
More clarity by August – legislation to permit, inter alia, more gaming machines in casinos is ready. We may know the new government’s plans by the time of the prelims. Rank remains undervalued, in our view, even on lowered forecasts. We reiterate our Buy rating and 100p target price.
Rank Group Publication of land-based legislative reforms Greggs Feedback from Enfield site visits – supply chain focus to drive step-up to 3.5k UK Shops Wickes Group Highlights from the Investor Insight Event
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Certainty for long-term investment in casinos – realising the full potential upside from additional gaming machines (and sports betting) in casinos will take time. We are confident that the initial payback will encourage investors. We reiterate our Buy recommendation and 100p target price.
Q3 trading update - no change to forecasts
Rank Group^ (RNK, Buy at 71p) - Q3 update in line; forecasts maintained and further progress against targets
Major positive change – Rank’s casinos will be able to offer players more of the machines they want to play. Implementation may be a quarter later than we had expected but it will put the business on a structurally faster growth path. We reiterate our Buy recommendation and 100p target price.
Meeting Notes - Feb 06 2024
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A solid 1H means FY24 is on well on track. Medium term targets underpin double-digit EBIT growth with additional upside risk from a return of higher-rollers and implementation of Gambling Act reforms. Trading at 5.0x FY24 EV/EBITDA (and potentially as low as 3.6x FY26 EV/EBITDA), we reiterate our B
Rank Group^ (RNK, Buy at 78p) - Tourist tax to be scrapped?
Rank Group^ (RNK, Buy at 70p) - H1 results: Inline with rebuild assumptions and (much) more to go for
Strong growth across all divisions Rank reported its H124 results (June Y/E) this morning with group LFL NGR of £362.6m, +9% YoY (GBYf £361m) and LFL underlying operating profit of £21.7m (GBYf £16m), with Q1 growth trends broadly continuing through Q2. All 4 divisions grew in H1, with Grosvenor and Enracha LFL NGR +10% YoY, Mecca +9% and Digital +8%. For FY24, energy costs are now expected to be c.£18.5m, £1.5m lower than prior expectations (85% fixed for H224), down from £28.6m in FY23. The balance sheet remains in a strong position with total cash and available facilities of £137.6m. During January, the group secured a financing package totalling £120m, comprising of a £30m September 2026 Term Loan and a £90m January 2027 RCF. During the period, the group identified a total of £5m of prior year adjustments (£3.8m of trading related costs and £1.2m of excess releases to income within the Digital business) which erroneously had not been recognised in prior year financial statements. £0.6m of this relates to FY23, with the balance relating to pre FY23, and this has now been rectified. Conference call Management will host a presentation at 9.30am; webcast can be accessed at www.rank.com. Valuation and investment view Overall, this is another positive update from Rank, with continued strong growth trends across all four divisions. The completion of compliance assessments from both the UKGC and the Gibraltar Commissioner is a positive endorsement for the group’s responsible gambling and compliance efforts. Its new debt facilities give the group more than sufficient headroom to invest in upcoming opportunities created by the White Paper. In terms of numbers, we are unlikely to move our FY24 operating profit number from £44.5m. Looking further across the forecast horizon, in FY25 employment cost inflation is trending ahead of our expectations, however the net Gambling Act Review benefit (not currently in numbers) will more than mitigate this the. We view the valuation of Rank as extremely undemanding, given the group’s earning trajectory, and reiterate our BUY recommendation.
Foundations built – Grosvenor casinos are showing positive operating leverage, Digital is reporting strong growth for core brands and positive regulatory change is just around the corner. We reiterate our Buy recommendation and 100p target price.
Back to the future – Rank had a tough pandemic, and compliance changes contributed to a slow recovery in visit numbers. However, 1Q24 trading showed real momentum, which we expect to be enhanced by Digital product improvements and, later this year, more slot machines in casinos.
Rank Group^ (RNK, Buy at 71p) - More slots and more action in 2024?
Back to the future – Rank had a tough pandemic and compliance changes contributed to a slow recovery in visit numbers. However, 1Q24 trading showed real momentum, which we expect to be enhanced by Digital product improvements and, later this year, more slot machines in casinos.
Regulatory tipping point – We discuss how the benefits to Rank’s casinos from regulatory changes in 2005 and 2007 were undermined by the Gambling Commission changing its interpretation of rules. We believe that tightening is coming to end, just as positive change is on the horizon.
Rank Group's 1Q trading update was in line with our forecast (revenue +11%) and keeps it well on track to deliver FY revenue and profit in line with expectations. Rank remains cheap, trading on just 4.9x FY24 EV/EBITDA; should the upside from the Gambling Act review coming to fruition (we expect £2
Recovery play with regulatory supercharger – Rank is highly operationally leveraged, and a solid recovery is starting to feed through to the bottom line. More casino gaming machines have potential to boost growth materially, probably from the autumn of 2025. We upgrade from Add to Buy. TP 100p.
Rank Group^ (RNK, Buy at 77p) - Q1 update underpins full year assumptions
Rank Group^ (RNK, Buy at 80p) - Back to £100m?
Meeting Notes - Aug 18 2023
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Rank's overall message is that the business has turned a corner (2H23 revenue +13% vs. 1H +2%), and that the stronger 2H momentum has continued (+16% NGR ytd). Even a doubling of EBIT this year (NUMe £46.2m) leaves it well behind £120m EBIT expectations pre-Covid, implying multiple years of growth
Rank Group^ (RNK, Buy at 89p) - FY inline; strong start to FY24F
FY23 saw modest revenue growth and sharply increased labour and energy costs. FY24 has got off to a promising start and, with cost inflation abating, there is scope for positive operating leverage to show through even before the upside from regulatory change starts to kick in next year.
Open for business – Rank has had a torrid time, with rising energy and other costs and a slow recovery in revenue in its venues businesses. In FY24 it is well-placed to benefit from the payback on investments and, next year, from positive regulatory change.
Rank Group (RNK) - Buy at 97p - A slot in the arm!
After recent downgrades, Rank has reached an inflection point with momentum returning to Grosvenor and management guiding to at least the top end of previous guidance. We still await the (expected positive) publication of the Gambling Act Review which should prompt upgrades and further support Rank
Rank Group (RNK) - Buy at 71p - Q3: Improved trading and upgrades
Gaining momentum – Rank reported improving momentum at the start of 2H23 and today’s trading update confirms that this has continued. The group has the resources to continue to invest in upgrading venues and enhancing the digital offer and we expect it will continue to recover.
Rank Group has faced numerous external challenges since 2020: the ravages of the COVID-19 pandemic and tighter regulatory requirements, in particular the negative effects of required affordability restrictions, have been followed by the recent cost of living crisis and higher inflation. These external challenges have masked the group’s underlying transformation, which is extending and improving the product offer, while making the organisation more efficient to drive future growth and innovations. With revenues at key assets well below pre COVID-19 levels, Rank Group has the potential to demonstrate rapid revenue and profit growth on a normalisation of demand and costs pressures, before the potential for easing regulation is considered. Based on consensus EV/sales, Rank Group’s valuation is at a significant discount to its own historical multiples.
1H weakness but consistent with guidance
Impairment charges and dilapidation provisions total over £100m in today’s results reflecting prudence over the outlook and Rank’s valuation multiples are quite demanding. But now, when energy prices are high, consumer confidence is low and multi-year investments are beginning to pay off is the wrong time to turn more cautious. After a strong share price recovery from the recent lows we are increasing our target price from 90p to 100p and changing our recommendation to Add from Buy.
Rank has issued a profit warning, with a recovery in Grosvenor failing to materialise as expected. The mid-point of the new £10-20m EBIT guidance is 70% below our previous forecast. Despite the delay to the earnings recovery, RNK offers compelling value at 4.6x FY23 EV/EBITDA. This would be materia
It is taking longer than we expected for customers to return to casinos, and spend per head remains subdued. However, we expect investments targeting repositioning to mass-market consumers to pay off. Further, Grosvenor is one of the few potential beneficiaries from a rationalisation of regulation likely to result from the white paper. We believe that today’s announcement reflects a delay not a defeat, and we reiterate our Buy recommendation and 90p target price.
Rank's Q1 trading update struck a cautious tone. The incrementally positive news of £12m lower than previously epected energy costs is more than offset by consumer confidence and other input cost pressures. Whilst we are encouraged by digital and Spain, we cut our EBIT forecasts by £7m for FY23 (14
Balancing the potential for positive regulatory change and upside surprise from Digital with the pressure on the consumer and volatile energy costs, we reiterate our Buy recommendation and have lowered our target price from 175p to 90p.
The leisure and hospitality sectors are a significant consumer of energy. Generating c£2-4 of revenue for every KWH of energy consumed, pubs look particularly exposed to rampant energy prices, with Rank’s recent update pointing to a 3.5x increase in energy costs for the next 12 months over CY19. Material hedging however is often in place for quoted operators, with a number hedged out to 2024. As bluntly pointed out by UKHospitality, without Government support more industry-wide closures is to be expected, with SME’s likely to suffer the brunt.
RNK WTB SSPG RTN MAB MARS JDW BOWL
There are clear signs of improving momentum for FY23 although the spectres of energy costs and cost-of-living squeeze means this will be another challenging year. However, the current share price has already more than factored this in (3.7x FY24E EV/EBITDA) meaning on our rebased forecasts, which d
Transformation programme can offset some of cost drag Rank reported FY22 results in line with recently-lowered expectations. We are not changing forecasts today. Digital is showing good progress and London customers are returning to Grosvenor. However, ex-London Venues customer numbers are slower to recover and there are cost pressures. In particular, FY23E energy costs would be £46m at current spot prices (up from £23m in FY22). The delayed UK White Paper has the potential to benefit Grosvenor Venues and, in light of that, we reiterate our 175p target price and Buy recommendation. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com, William.Jones@peelhunt.com
Downgrading for high energy costs Rank has already guided in relation to its FY22 profits to be expected with next week’s prelims. It has also previously highlighted its exposure to spot energy prices. Reflecting on this exposure in relation to FY23E and beyond, we are pre-emptively cutting our operating profit forecasts by £25m for FY23E and FY24E. We expect to have reached a floor from which lower energy prices, trading outperformance or positive regulatory change would result in upgrades. Ahead of the prelims we reiterate our Buy recommendation and 175p target price. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com, William.Jones@peelhunt.com
Long Covid, delayed recovery, worthwhile prize In early 2020 Rank’s share price was over 300p, buoyed by the dramatic cost changes achieved in the Grosvenor casinos venues business, coupled with promising revenue growth as customers responded to a refreshed offer. There was also upside potential from bringing Digital technology in house. Leisure behaviour has changed since then, as commuting has changed and regulation has impacted Digital. But the current share price seems to imply that trading seen in the early 2022 when overseas visitors were staying away is the new normal. We expect a recovery, a boost to digital, and positive regulatory change. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com 6-page note
According to an article in the Times, the UK Government is finally set to issue its report on UK gambling legislation. If the measures highlighted in the article are to prove correct, we would see the potential outcome as better than feared, with a potentially big win for Rank Group.
RNK ENT FLTR
The Times article says White Paper will harmonise casino slots Today’s Times says the gambling white paper will permit Rank’s “1968 Act” casinos to have the same number of gaming machines as “2005 Act” competitors. With such harmonisation, Rank might approximately double the number of machines in its Grosvenor venues estate, increasing the appeal of the venues to mass-market customers. We discussed the upside potential in our 12 April note. The Times is less clear on how the White Paper might change online regulation but, positively, it does suggest that affordability checks will be “non-intrusive”. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com, William.Jones@peelhunt.com
Downgrades: return of overseas casino customers delayed The softer performance by Grosvenor venues reported in April has continued. We are downgrading our FY22E EBIT from £50m to £40m, in line with today’s guidance. Once overseas customers return, trading may bounce back to previously expected trends, but for now we reduce our FY23E EBIT from £91m to £77m. Almost all the weakness is in Grosvenor, where capital investments continue in order to make the venues more attractive as post-Covid-19 demand patterns establish. We lower our target price from 220p to 175p but retain our Buy. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com
Digital – the best numbers are yet to come Rank’s Digital business, and the wider group, have been through the Covid-19 wringer. During the pandemic the Digital management team stuck to its game plan and focused on delivering the transformation made possible by the acquisition of Stride in 2019. This focus may have cost some short-term performance, but with Mecca already migrated to the in-house platform and Grosvenor on the way, the payoff should come soon. Jon Martin, the Digital MD, talked to us about what he and his team have in store – please watch the video of our discussion. We reiterate our 220p target price and Buy recommendation. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com To watch our video interview, open the report and click on the image like the one below: 10-page note
Slower than expected trends at Grosvenor casinos in Q3, particularly towards the end of the quarter (March) has led management to cut FY22 EBIT guidance by 15%. The shares remain inexpensive, on <4x FY23 EV/EBITDA with potential upside from a favourable Gambling Act Review expected to be publish
Issuer Sponsored NEWRIVER+ (NRR, HS at 87p) – Capital values up, LTV down and FY22F FFO to be at the top-end of market expectations; an excellent outturn FTSE 100 BARCLAYS^ (BARC, Buy at 149p) – Absa share sale FTSE 250 AJ BELL^ (AJB, Buy, 291p) – Q2 net flows in line with FY expectations MAN GROUP^ (EMG, Buy, 241p) – Net inflows beat, more than on track FTSE SmallCap XPS PENSIONS^ (XPS, Buy at 136p) – In-line FY22 pre-close update Main Market RANK GROUP^ (RNK, Buy at 127p) – Soft Q3 update; operating profit guidance lowered
RNK XPS BARC NRR
A few last coughs and splutters before the engine accelerates Covid-19 appears to be continuing to impact attendance at Grosvenor’s casino venues at the start of 4Q22. A revenue undershoot at this operationally leveraged business close to the financial year end has prompted management to lower its FY22E EBIT guidance range by 15% at the mid-point, from £55-65m to £47-55m. We are lowering our forecast by 9%, from £55m to £50m. We see no reason to expect a cross-infection into our FY23E forecasts, which we are not changing today, and we reiterate our Buy recommendation and 220p target price. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com
Before we were so rudely interrupted Rank’s transformation programme delivered material progress in 2019, and then Covid-19 hit. We believe that a strong recovery at Grosvenor’s casino venues, and Digital finally delivering on some of the promise of the Stride acquisition, will offset profit weakness at Mecca. Reflecting utility and labour cost increases we are lowering our forecasts with this note to the low end of the guidance range for FY22E (FY22E EBIT down by 9%, FY23E by 16%). There is material upside potential from possible regulatory change, not in our forecasts. We have lowered our target price to 220p and reiterate our Buy recommendation. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com 21-page note
See the new format Mecca club We visited the new format Mecca club in Luton: a modern leisure venue with an upgraded food and beverage offer and plenty of non-gaming space. The biggest single difference is that the main hall tables are no longer fixed to the floor, and the coin mechanisms that used to link them have gone, meaning the space can be used in different ways, such as for Bonkers Bingo and for Friday Fest. Instead of the traditional fixed sessions, the plan is to run games throughout the day: “rock up and play whenever you want”. It has only just reopened, so too early to know how customers will respond, but it looks a step forward to us. To see our video of the new Mecca format in Luton, please open the note and click on the image like the one below. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com
Rank has reported 1H revenue of £333m and EBIT of £24.1m (back to profitability), both in line with our forecasts of £326m and £26.6m resp. Bar the Dec/Jan hiccup from Omicron, Grosvenor is recovering strongly, but the older Mecca bingo cohort looks only likely to recover more slowly. The migration
Getting the swan the right way up Covid-19 required Rank to close and reopen venues, conserve cash and preserve a skilled, trained employee base. But, beneath the surface, a great deal of work on the transformation was proceeding smoothly and we believe that this is going to be increasingly apparent as normality returns. We are not changing our forecasts following today’s in-line interim results; our FY22E EBIT forecast is £60m, guidance is £55-65m (narrowed from £50-75m). But the change wrought by having net cash on the balance sheet is clear from the plans to accelerate investment. We reiterate our Buy recommendation and 240p target price. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com
Are you doing your hair shirt differently? There is something different about Rank this year that the share price does not seem to have noticed: it has a healthy net cash position following the successful conclusion of its VAT refund claim. This means that even if the post-Covid recovery is lumpy, we expect Rank to be able to continue to invest for the future and consider returning to paying dividends this year. The interims on 27 January should show continued Covid-related disruption, particularly in Mecca Venues. However, Grosvenor Venues, after much work on the cost base, should be showing attractive operating leverage. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com
Rank is the leading casino and bingo operator in the UK. Whilst we are cautious on Mecca bingo given its demographic and track record, we think there is untapped potential for Grosvenor, particularly its online business where the omni-channel opportunity could be significant. Trading on a highly co
VAT amount agreed Rank has agreed the size of its previously agreed VAT refund claim, amounting to £83m including interest, gross of 19% corporation tax. We update our FY22E forecast to account for the gross inflow, which results in FY22E yearend net cash of £55m (on an IAS 17 basis), up from net debt of £28m previously. Rank is now well-positioned to invest selectively as it weathers a somewhat uncertain winter. We reiterate our Buy recommendation and 240p per share target price. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com
How confident? Confident enough to increase capex Rank has the confidence to increase its FY22E capex target today (by £10m, to £50m). Investments in Grosvenor casino venues have a rapid payback and position the business for a possible increase in the number of gaming machines permitted. We are upgrading our low-end forecasts in light of today’s 1Q22 trading update (FY22E EBIT to £60m, up 25%, EPS to 8.1p, up 33%). Trading is recovering, the payback on the migration of digital is due in FY23E and there is potential material profit upside from regulation. We reiterate our Buy recommendation and 240p target price. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com
Down at the virtual Peel Hunt Arms: A pint of Doctor’s Orders Some of our best conversations take place in the pub. This week we discuss the increase in UK Covid cases and hospital admissions with Miles Dixon from our healthcare team, and what policy options are open to government if measures continue to deteriorate. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com, Miles.Dixon@peelhunt.com To watch the video of Ivor and Miles down at the virtual Peel Hunt Arms, please open the note and click on the image like the one below.
Size of relief: c.£80m gross, HMRC will not appeal VAT case Rank notes that HMRC has decided not to appeal the Tribunal decision in its long running VAT case. There will now be a period of up to 60 days in which Rank and HMRC will agree the exact quantum of the claim, which Rank expects to be £80m gross before corporation tax and costs. This is excellent news on simple valuation grounds. It also removes any residual pressure on Rank’s balance sheet (Rank had £50m of net debt on an IFRS 16 basis at 30 June) and puts management back in a position where it can plan for the long term in terms of investment. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com
Reopening; play Yesterday’s presentation made clear that the past 18 months have been about more than just Covid-19 at Rank. The transformation programme, which so impressed investors from mid-2019, has continued; venues have benefitted from investment in the product offering, and Digital is set to migrate to the in-house platform by mid-2022E. We believe RNK is already undervalued on our ‘recovered’ forecasts. Add some combination of positive regulatory change, landing the £80m VAT win, and a re-rating would push our valuation higher. Confident of recovery, we reiterate our Buy and 240p target price. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com 5-page note
Liquidity and lofty ambitions Rank has started FY22E with trading recovering. It has the resources to invest in ambitious plans to upgrade the offer to customers across the group and create a true multi-channel offer. We are not changing our forecasts materially today and the outturn for the year remains uncertain, but we are confident that Rank has a comfortable liquidity position to cope with any bumps on the road. With recovery only just getting under way we reiterate our 240p target price and Buy recommendation. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com
Share price beginning to recognise reopening play Rank’s share price has bounced off recent lows, but we believe it has further to go as the trading recovery becomes more established. Ahead of Thursday’s prelims we reiterate our Buy recommendation and 240p target price. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com
Government positive on possible casino regulation change Last week the government minister responsible for gambling appeared to be sympathetic to calls for regulatory change, which would permit more gaming machines in GB casinos. An increase from 20 machines, the current maximum in most of Rank’s casinos to, say, 80, would materially change their profit potential. With this upside a possibility and management’s “Transformation 2.0” already underway, we reiterate our Buy recommendation and 240p target price. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com
The facility to think ahead Rank has announced that it has agreed an additional two-year £25m RCF with Lloyds Bank. We regard this as an encouraging sign of confidence on the part of the bank. Management notes that the facility provides additional liquidity but also, at the right time, the capacity to accelerate investment in the group’s transformation plan. Covid-19 interrupted Rank’s plans to upgrade its services and to make them more relevant to more consumers. Today’s announcement makes it clear that management is getting ready to put Covid-19 behind it. We reiterate our Buy recommendation and 240p target price. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com
Healthy yearend cash position, positive VAT case progress Rank has won its £80m VAT case; we now have to wait and see if it will be appealed by HMRC. The business traded as expected in the final quarter (to June) and managed cash effectively, with the result that it has a comfortable margin over its liquidity requirement. With Covid-19 restrictions easing, potential for positive regulatory change, and a possible material VAT refund, we reiterate our Buy recommendation and 240p target price. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com
Knock at the door – Digital up 4 (per cent) Digital continued to turn the corner in 3Q21 and the venues in Spain are showing encouraging signs that customers are keen to come back despite continuing Covid-19 restrictions. Assuming that the UK venues can open in May as planned, Rank has an adequate liquidity. We expect a strong reopening from venues and we reiterate our Buy recommendation and PE multiple-based 240p target price. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com
UK gambling regulation: health issue or leisure activity? CMS held an excellent conference yesterday on the review of the Gambling Act. We concluded that the risk of the UK Gambling Commission imposing tight “affordability” limits is diminishing; that the commission continues to argue for broad regulatory change based on the behaviour of a (probably) small number of bad actors; and that a population-wide “public health approach” to regulation would undermine an industry that is working hard on solutions focused on individuals. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com 2-page note
Down at the Virtual Peel Hunt Arms – A shot of Rank We have recorded a short video update on Rank to set out our current views. With the reopening of venues hopefully just around the corner, we discuss the success so far with the Transformation Programme, as well as the upside potential for Digital from migrating to the in-house technology platform. We reiterate our Buy recommendation and 240p target price. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com To watch the video of Ivor discussing Rank, please open the note and click on the image like the one below.
Rank generated EBITDA of £150m in the 12 months to December 2019. Then the pandemic struck. Its venue business has effectively been closed for a year, with draconian restrictions in the brief period it reopened, and a knock-on effect to digital. With the estate set to reopen in May, alongside other indoor entertainment, with the relief of no curfew and other restrictions potentially lifted by June, we look forward to a rebound in FY2022 and a return to pre-Covid profitability the following year. Rank trades on under 6x historic EBITDA, compared to 8-9x immediately prior to Covid, which on recovery implies upside beyond 250p per share. Beyond this, we see scope for a successful execution of its Transformation programme, market share gains and consolidation opportunities. BUY.
Down at the Virtual Peel Hunt Arms: A pint of Double Stout Some of our best conversations used to take place in the pub. This week we discuss: the drop in hospitality supply in 2020; our expectations for supply reduction in 2021 and its implications for the sector in 2022 and beyond; Rank Group’s positive surprise on liquidity, and the upside from its transformation programme and in-house digital platform; the upside and potential risk in relation to regulation in Ontario; the newsflow/events pipeline; and valuation discounts. We discuss Rank Group#, amongst others. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com To watch the video of Douglas and Ivor down at the Virtual Peel Hunt Arms, please open the note and click on the image like the one below. #Corporate client of Peel Hunt
1H21 ended with better cash position than we had forecast Rank ended 1H21 with £128m of cash and facilities; £16m more than our forecast. We estimate that the group would have adequate liquidity even if the venues did not open until June, but we expect reopening to start before then. As expected, we are lowering our FY21E forecasts (EPS to (20.9p) from (12.7p)) but this does not impact our view on Rank’s potential value. We reiterate our Buy recommendation and 240p target price. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com
Treading water but ready to make a splash Rank’s interim results next week will tell us little about the potential of the business; with the venues closed, success is measured in terms of preserving the proceeds of last November’s placing. But we hope to get some hints about how the venues may be repositioned post-Covid-19 and about Digital returning to growth. We reiterate our Buy rating and 240p target price. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com
UK gambling regulations in 2021: this will not end well The UK Government has started to consult on how gambling law should change. It appears to be adopting a balanced tone and is prepared to consider the economic value of the industry and consumer freedom, as well as reducing gambling-related harm. Rank# has some potential upside if permitted additional gaming machines in casinos. However, the law seems very likely to become more restrictive and, if the UK Gambling Commission imposes “affordability” checks, online revenue could fall sharply. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com 6-page note #Corporate client of Peel Hunt
Been to the cashier, chips on the table, ready for anything The £70m placing last month positions Rank to trade through Covid-19. It will emerge with fewer competitors to its venues businesses and an online operation benefiting from both the Stride acquisition and the channel shift to online. We update our forecasts for the additional challenges created by Covid-19 since the summer and reiterate our Buy rating and 240p target price. Ivor.Jones@peelhunt.com, Douglas.Jack@peelhunt.com 6-page note
Rank entered the current crisis with strong momentum and limited debt. Costmitigation measures are set to limit further cash burn and we estimate that the group can reach breakeven and then profitability on revenues from its venues running at just half recent levels. Like many, it faces a long and uncertain journey to the new normal. What we do know is that there appears to be a significant level of bad news now factored into the share price (we estimate the market is discounting a permanent c30% fall in Venues revenues going forward). Holding several aces, including the balance sheet, an enlarged and growing Digital business and a management team capable of navigating these difficult times, Rank appears well positioned to take advantage of the opportunities that will undoubtedly emerge from the crisis. Turning to the late Kenny Rogers, we still expect Rank to be “sittin’ at the table…when the dealin’s done”. On balance, after putting Rank under review in March, we now reinstate our BUY recommendation.
The second half of 2019 was a monumental period for the group. The transformation programme has reinvigorated performance, with the acquisition of stride bringing both the scale and platform to build a meaningful Digital business. Our FY2020F EPS estimate has increased from 16p last June to 22p at present; with further strong growth expected over the medium term our earnings forecast builds to c30p per share by FY2023. Although the shares have performed strongly over the period (+88%), the current valuation fails to reflect the momentum and ongoing opportunity in our view. Simply maintaining current metrics (adjusting for the likely cash position) could see the shares worth approaching 450p on a two-to-three-year view. As we have previously argued this could prove merely a staging post, with the balance sheet capacity for a much bigger business. BUY.
It has been a rewarding six months for Rank. The transformation plan is delivering significant momentum (LFL growth of 10% in Q1) and the Stride acquisition broadly doubling digital; we now forecast FY2020F PBT increasing 37% to £96m. Is Rank on the cusp of delivering sustainable growth and having the platform to build a meaningful digital operation? We believe so. On our estimates, Digital profit is set to build to £50m by FY2023F, an incremental 6p per share over 2019A, supported by numerous operating initiatives across both Retail and Digital. We see a forward PER of 11x as too low and set fair value at 275p
Rank has announced the completion of its c£90m acquisition of Stride Gaming, a leading online bingo operator. We believe that Stride is a significant strategic step for Rank: creating a near £200m annual revenue digital business (becoming a top six UK player) with its own proprietary platform and in-house development capabilities. On our estimates it also worth an incremental 3p/share to group earnings (post synergies). The recent preliminary results highlighted an improved performance in H2 and we expect further progress when the group updates on trading at its AGM on 17th October. On a FY2020F PER of 12x and an EV/EBITDA of 6x (pre-Stride), we reiterate our BUY stance.
Last Friday, Rank Group announced the agreed 151p per share offer for Stride Gaming, one of the UKs leading online bingo operators. We see significant strategic merit in the transaction: effectively doubling Rank’s digital revenues, providing significant synergy benefits and bringing more of its technology in-house through Stride’s proprietary platform, supporting further growth both in the UK and internationally. We estimate an acquisition multiple of under 5x (including synergies) and a potential 20%+ uplift to proforma earnings. We see this earnings accretion, the remixing of the revenue stream and the opportunity to use acquired technology to accelerate growth, including international, as a catalyst to upgrade our HOLD recommendation to BUY.
After many months of procrastination, the UK government has finally delivered a verdict on the fixed odds betting terminals (FOBTs), reducing stake limits from £100 to £2. Although not entirely a surprise, this is a disappointing result for the industry and will likely entail more than 3,500 shop closures. Also, while a decision has been made, there is still much uncertainty regarding timing and implementation. For online operators, there is a further blow, in the form of potential increases in gaming taxes at the next budget. This confirms recent speculation and is now widely expected to increase from 15% to 20%.
Rank’s trading update (13 weeks to 1 April) showed 17% growth in Digital, but the core Venues disappointed, with Mecca down 2% and Grosvenor down 9% on a like-for-like basis. The shortfall was largely due to fewer customer visits, as well as a lower gross win margin from VIPs. The company expects the weaker consumer environment to continue and has now guided to FY18 clean EBIT of £76-78m vs previous consensus of £83m. We have adjusted our forecasts to the lower end of guidance. The stock has dropped sharply on the news and trades at 5.7x EV/EBITDA and 11.8x P/E for CY18e, which is a meaningful discount to peers.
Similar to last year’s trends, Rank reported that total Venues l-f-l revenues declined by 1%, mainly due to lower customer visits. This was offset by a 16% increase in Digital, where Mecca digital has clearly turned the corner. To reflect the lighter result in Venues, we have lowered our FY18 and FY19 revenue estimates by c 2-3%, but improved operational efficiencies mean that our profit forecasts are largely unchanged. The business model remains highly cash generative, with £4m net cash achieved at H118 and the stock’s trading multiples are attractive at 6.8x EV/EBITDA, 13.6x P/E and 8.1% free cash flow yield for CY18.
The 19% growth in digital revenue is the key highlight in Rank Group’s trading update (16 weeks to 15 October). Grosvenor digital was up 34% and, encouragingly, Mecca digital has moved to double-digit growth (up 11% vs 2% in FY17). In a continuation of previous trends, Venues l-f-l revenues declined by 1%, leading to a 2% l-f-l growth in total group revenues. Notwithstanding the decline in Venues, the core business is highly cash generative, enabling progressive dividends, as well as potential M&A. Rank Group does not face any B2 FOBT risk from the triennial review and may even benefit if it is allowed more machines. Despite this, the stock trades at c 6.8x EV/EBITDA for CY18e. Management reiterated its expectations for the full year and our estimates remain unchanged.
Rank Group’s FY17 results highlighted the growth potential of its Digital division. Online revenue grew 15.3%, with an impressive operating margin of 20.4% (vs our 14.2% estimate). By contrast, Venues were slightly light, with like-for-like revenues declining by 0.7%, due to fewer customer visits and tighter due diligence. However, Venues’ KPIs have improved in H2 over H1 and FY18 has started well. Our headline revenue forecasts are broadly unchanged, although we have lowered our FY18 operating profit by 2.2%, as result of higher employment costs in Mecca. We continue to anticipate a move into net cash in FY18, underpinning Rank’s progressive dividend policy. Trading multiples are attractive, with CY18e EV/EBITDA of 6.8x, P/E of 13.7x and free cash flow yield of 8.8%.
Rank Group aims to be the UK’s leading omni-channel gaming operator and, as outlined at its capital markets day, the strategies for its Venues and Digital verticals are clearly interlinked. With an open architecture platform, Digital is well positioned to leverage the existing retail customer base and a single wallet (piloting in autumn 2017) could be a game changer for Grosvenor digital. Meanwhile, the core Venues businesses are being reinvigorated and remain highly cash generative. With its progressive dividend policy and potential online upside, Rank’s calendar 6.9x 2017e EV/EBITDA appears low.
In line with expectations, l-f-l revenues (46 weeks to 14 May) increased 1%, with a 13% growth in digital offsetting a slight revenue decline in Grosvenor Casinos’ and Mecca’s venues. Earlier platform issues have been resolved and we expect digital revenue growth to accelerate, with the H118 introduction of a single wallet fuelling market share gains. The core business is highly cash generative, enabling progressive dividends, as well as potential M&A. Despite this, the stock trades at a calendar 2017e 6.5x EV/EBITDA, a 30% discount to peers. Our estimates are unchanged.
Rank has a unique opportunity to leverage leading UK high street casino and bingo brands online. With platform issues resolved, its digital casino is growing strongly and the introduction of a single wallet later this year could be a game changer. Economic pressures are weighing on venues’ results, but they are highly cash generative. An expected move into net cash by end FY18 underpins a progressive dividend policy and gives Rank plenty of firepower to participate in industry M&A as opportunities become available. The calendar 2017e EV/EBITDA of 6.6x looks very low.
Interims reflected high street cost pressures (EBITDA -5%) and we have trimmed FY17e EPS by 2%. However, Digital’s 11% revenue growth was very encouraging, with an acceleration in Q2 as platform problems were ironed out. The core argument for Rank remains intact: scope to materially grow in Digital via better cross-sell of its land-based brands. Despite a lacklustre short-term profits outlook, the group remains highly cash generative, which underpins a progressive dividend policy and FY17e yield of 3.7%. The FY17e EV/EBITDA is only 6.2x, 37% below the peer average.
Rank has reported flat revenue for the first 15 weeks, against a strong 2015 comparative. Mecca digital has just been relaunched, supported by a new TV campaign, and better cross-sell remains a key opportunity for Rank. We expect profits to be H2 weighted, and with a slightly uncertain consumer outlook we have trimmed full year estimates, but Rank remains strongly cash generative. This underpins its progressive dividend payout and leaves it flexible to take advantage of acquisition opportunities.
A weak Q416 left final results a tad below our forecasts despite good results in Mecca venues and Grosvenor digital. However, cash generation was strong and the dividend was lifted by 16%. The organic growth strategy (focusing on multi-channel development) remains intact and while the failure to progress what would have been a transformational acquisition of William Hill (with 888) was a disappointment, it demonstrates the scale of management’s ambitions. We suspect that future accretive opportunities will arise within the consolidating online gambling space.
Rank’s 10-month IMS showed a solid performance in its venues and strong growth in Grosvenor digital, an important growth driver for the group. News of softer trading in Mecca digital since the recent platform migration is slightly disappointing, but it is early days and Rank has good organic growth prospects as it moves towards a true multi-channel offering, potentially augmented by acquisitions if the right opportunities arise. Our profit estimates are unchanged and the balance sheet is very strong. The 2016e EV/EBITDA of only 7.3x looks too low
The successful launch of its new digital platform, on time and budget, marks a key milestone for Rank and a major step towards its goal of a full omni-channel gaming product offering. Digital channels are the key growth driver for Rank and the new platform already offers new products and functionality, enabling Rank to further leverage its strong land-based gaming brands. After recent profit taking the FY16e EV/EBITDA is only 7.8x, yet the group is delivering good growth and strong cash flows.
Rank has reported a good start to the year, with revenue up 7% and Grosvenor Casinos performing particularly well. Our recent initiation report highlighted Rank’s opportunity to leverage its brands with an improved multi-channel offering. Digital revenues continue to grow at c 20% with migration to the new IT platform on schedule for early 2016. Our estimates are unchanged, with the potential for organic growth to be augmented by acquisitions at some stage given the group’s balance sheet strength. Yet the FY16e EV/EBITDA is still undemanding at 8.5x.
Rank has been re-energised over the past year. FY15 results showed encouraging progress, but we believe this is only the start, with digital gaming beginning to grow strongly and plenty of scope to leverage the Mecca and Grosvenor brands with a true multi-channel offering. Rank’s underlying business is strongly cash generative, with debt on track to be eliminated by the end of FY18 in the absence of any acquisitions. The shares have performed well, but still trade at a discount to the sector (FY16 EV/EBITDA only 8.3x) and a sum-of-the parts suggests a value of 290-360p.
