Rank Group |
Digital revenues are back on track |
IMS - 46 weeks to 14 May |
Travel & leisure |
18 May 2017 |
Share price performance
Business description
Next events
Analysts
Rank Group is a research client of Edison Investment Research Limited |
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.
Year |
Revenue* |
EBITDA** |
PBT** |
EPS** |
DPS |
P/E |
Yield |
06/15 |
738.3 |
126.3 |
74.1 |
14.6 |
5.6 |
14.1 |
2.7 |
06/16 |
753.0 |
128.2 |
77.4 |
15.4 |
6.5 |
13.4 |
3.2 |
06/17e |
764.0 |
127.0 |
76.0 |
15.3 |
7.1 |
13.5 |
3.4 |
06/18e |
785.0 |
133.0 |
81.5 |
16.4 |
8.2 |
12.6 |
4.0 |
06/19e |
813.0 |
140.0 |
88.0 |
17.7 |
8.8 |
11.6 |
4.3 |
Note: *Revenue is before customer incentives. **Normalised, excluding amortisation of acquired intangibles, one-off and exceptional items.
Growth in digital: Mecca has turned the corner
Digital revenues increased 13% vs the prior year, with Grosvenor Casinos’ digital channel growing 35%. Importantly, previous platform migration issues at Mecca’s digital channel now appear to be resolved and Mecca’s digital revenues increased 2% over the period, implying an uplift since December. As detailed in our Outlook note in February, Rank has only 2% of the UK online casino market despite being the leading UK casino operator and number two in bingo. We anticipate market share gains, with the introduction of a single wallet in H118 providing cross-selling opportunities. Rank’s Capital Markets Day on 24 May should provide further details.
Venues slightly down
L-f-l revenues at Grosvenor Casinos’ venues declined by 1%, affected by a lower gaming margin. Mecca’s venues l-f-l revenues were down 2%, with lower customer visits partially offset by an increased spend per visit. This is in line with our FY17 figures. For FY18 onwards, we note that Grosvenor could benefit from the current triennial review, if it is allowed to add more gaming machines. Additionally, a potential clampdown on betting shop FOBT machines would be competitively helpful.
Valuation: Attractive 6.5x 2017e EV/EBITDA
Rank’s calendar 2017e P/E and EV/EBITDA are 7% and 30% below the peer average, respectively. It has more consumer exposure than pure online peers, but substantially more digital upside and none of the FOBT risks faced by the bookmakers. An expected move into net cash by FY18 underpins a progressive dividend policy and provides the firepower for potential M&A. Our forecasts remain unchanged.
Exhibit 1: Financial summary
£m |
2014 |
2015 |
2016 |
2017e |
2018e |
2019e |
||
June |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||
Revenue |
|
|
707.7 |
738.3 |
753.0 |
764.0 |
785.0 |
813.0 |
Cost of Sales |
(409.2) |
(414.2) |
(418.8) |
(437.8) |
(449.6) |
(461.6) |
||
Gross Profit |
298.5 |
324.1 |
334.2 |
326.2 |
335.3 |
351.5 |
||
EBITDA |
|
|
116.0 |
126.3 |
128.2 |
127.0 |
133.0 |
140.0 |
Operating Profit (before amort. and except.) |
72.4 |
84.0 |
82.4 |
80.0 |
85.0 |
91.0 |
||
Intangible Amortisation |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Exceptionals |
(46.5) |
2.1 |
9.3 |
(2.4) |
0.0 |
0.0 |
||
Operating Profit |
25.9 |
86.1 |
91.7 |
77.6 |
85.0 |
91.0 |
||
Net Interest |
(9.9) |
(9.9) |
(5.0) |
(4.0) |
(3.5) |
(3.0) |
||
Other finance adjustments* |
(1.6) |
(1.7) |
(1.1) |
(0.9) |
0.0 |
0.0 |
||
Profit Before Tax (norm) |
|
|
62.5 |
74.1 |
77.4 |
76.0 |
81.5 |
88.0 |
Profit Before Tax (FRS 3) |
|
|
14.4 |
74.5 |
85.6 |
72.7 |
81.5 |
88.0 |
Tax on norm PBT |
(13.9) |
(17.0) |
(17.4) |
(16.3) |
(17.5) |
(18.9) |
||
Profit After Tax (norm) |
48.6 |
57.1 |
60.0 |
59.7 |
64.0 |
69.1 |
||
Profit After Tax (FRS 3) |
0.5 |
57.5 |
68.2 |
56.4 |
64.0 |
69.1 |
||
Average Number of Shares Outstanding (m) |
390.7 |
390.7 |
390.7 |
390.7 |
390.7 |
390.7 |
||
EPS - normalised (p) |
|
|
12.4 |
14.6 |
15.4 |
15.3 |
16.4 |
17.7 |
EPS - (IFRS) (p) |
|
|
5.2 |
19.1 |
18.2 |
14.2 |
16.4 |
17.7 |
Dividend per share (p) |
4.5 |
5.6 |
6.5 |
7.1 |
8.2 |
8.8 |
||
Gross Margin (%) |
42.2 |
43.9 |
44.4 |
42.7 |
42.7 |
43.2 |
||
EBITDA Margin (%) |
16.4 |
17.1 |
17.0 |
16.6 |
16.9 |
17.2 |
||
Operating Margin (before GW and except.) (%) |
10.2 |
11.4 |
10.9 |
10.5 |
10.8 |
11.2 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
613.3 |
607.2 |
614.1 |
621.0 |
626.0 |
625.0 |
Intangible Assets |
390.2 |
395.7 |
404.3 |
405.0 |
406.0 |
407.0 |
||
Tangible Assets |
217.5 |
204.0 |
202.0 |
208.0 |
212.0 |
210.0 |
||
Deferred tax/other |
5.6 |
7.5 |
7.8 |
8.0 |
8.0 |
8.0 |
||
Current Assets |
|
|
87.9 |
123.4 |
100.5 |
107.0 |
116.2 |
118.4 |
Stocks |
3.1 |
2.8 |
2.9 |
3.0 |
3.2 |
3.4 |
||
Debtors |
37.7 |
31.0 |
36.6 |
37.0 |
38.0 |
40.0 |
||
Cash |
47.1 |
89.6 |
61.0 |
67.0 |
75.0 |
75.0 |
||
Other |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Current Liabilities |
|
|
(168.4) |
(309.4) |
(173.9) |
(182.0) |
(184.5) |
(189.0) |
Creditors (incl provisions) |
(164.0) |
(184.5) |
(159.5) |
(167.0) |
(170.0) |
(174.0) |
||
Short term borrowings |
(4.4) |
(124.9) |
(14.4) |
(15.0) |
(14.5) |
(15.0) |
||
Long Term Liabilities |
|
|
(290.5) |
(126.8) |
(188.1) |
(165.0) |
(135.0) |
(90.0) |
Long term borrowings |
(179.7) |
(17.6) |
(87.8) |
(75.0) |
(55.0) |
(20.0) |
||
Other long term liabilities |
(110.8) |
(109.2) |
(100.3) |
(90.0) |
(80.0) |
(70.0) |
||
Net Assets |
|
|
242.3 |
294.4 |
352.6 |
381.0 |
422.7 |
464.4 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
55.0 |
146.6 |
110.2 |
115.2 |
130.0 |
136.0 |
Net Interest |
(8.1) |
(7.5) |
(5.0) |
(3.0) |
(3.0) |
(2.5) |
||
Tax |
(19.1) |
(2.2) |
(31.1) |
(13.7) |
(16.3) |
(15.8) |
||
Capex |
(44.3) |
(31.9) |
(52.7) |
(50.0) |
(48.0) |
(46.0) |
||
Acquisitions/disposals |
0.3 |
(1.0) |
16.2 |
0.0 |
0.0 |
0.0 |
||
Financing |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Dividends |
(16.4) |
(18.6) |
(22.7) |
(26.6) |
(30.9) |
(33.6) |
||
Net Cash Flow |
(32.6) |
85.4 |
14.9 |
22.0 |
31.8 |
38.1 |
||
Opening net debt/(cash) |
|
|
104.1 |
137.0 |
52.9 |
41.2 |
23.0 |
(5.5) |
HP finance leases initiated |
(2.3) |
(3.1) |
(2.8) |
(3.0) |
(3.0) |
(3.0) |
||
Other |
2.0 |
1.8 |
(0.4) |
(0.8) |
(0.3) |
(0.6) |
||
Closing net debt/(cash) |
|
|
137.0 |
52.9 |
41.2 |
23.0 |
(5.5) |
(40.0) |
Source: Rank Group accounts, Edison Investment Research. Note: *Revenue is before customer incentives.
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