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.
Rank’s trading update highlighted that a variety of factors had caused a weaker trading environment in Q318: both Mecca and Grosvenor saw lower than expected visits, made worse by bad weather. In addition, Grosvenor experienced losses from VIP customers and did not see the expected recovery in visits at the two recently refurbished London casinos. On a like-for-like basis, Mecca saw a 2% y-o-y decline for the 40 weeks to 1 April and for the 13 weeks to 1 April; Grosvenor saw 3% and 9% declines respectively, and group revenues were flat and down 2% respectively. Trading for Digital remained strong with 17% growth over both periods.
Management is cautious about consumer demand and expects this to have a negative impact on UK venues for the remainder of FY18 and into FY19. The company now expects clean operating profit of £76-78m for FY18, compared to consensus of c £83m. We have reduced our forecasts to reflect the lower end of this range, with the majority of the cut coming from Grosvenor. We have also reduced our revenue and operating profit forecasts for FY19 and FY20. We have assumed that the company is able to partially offset the lower revenues through cost cutting, which is already underway. Overall, we have reduced our normalised EPS forecasts by 9.2% for FY18, 10.6% for FY19 and 10.2% for FY20.
Rank’s CY18 EV/EBITDA multiple of 5.7x is below the peer average of 10.2x. As evidenced by the decline in visitor numbers, Rank faces more retail challenges than its pure online peers, but it does have more digital upside. Despite economic and minimum wage pressures, the core business remains highly cash generative and Rank now has a net cash position of £4.0m. This underpins a solid dividend policy and provides the firepower for potential M&A.