SDX Energy — Solid well results kick off the campaign

SDX Energy (LN: SDX)

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Research: Energy & Resources

SDX Energy — Solid well results kick off the campaign

SDX Energy has announced two successful well results in recent weeks, with additional oil discovered in Egypt and more net pay found in its first Moroccan gas well than expected. The next six months are busy ones for SDX, with eight more wells to be drilled in Morocco to supply a high value gas market. Two wells will be drilled in Egypt to delineate its existing South Disouq discovery and two exploration wells will target prospects that could materially increase the gas resources. In addition, programmes at NW Gemsa and Meseda should materially increase production. Our NAV increases from 64p to 65p/share (increases in absolute terms are partially offset by foreign exchange movements).

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Energy & Resources

SDX Energy

Solid well results kick off the campaign

Well results

Oil & gas

19 October 2017

Price

51.75p

Market cap

£104m

£0.8/US$

Net cash ($m) at 30 June 2017

28

Shares in issue

204.5m

Free float

80%

Code

SDX

Primary exchange

AIM

Secondary exchange

TSX Venture

Share price performance

%

1m

3m

12m

Abs

1.5

7.3

93.5

Rel (local)

(2.4)

4.8

77.7

52-week high/low

67.4p

22.0p

Business description

SDX Energy is a North African onshore player listed in Toronto and London. It has oil and gas production in Egypt, and Moroccan gas production. A large gas discovery was recently made at South Disouq.

Next events

Moroccan well programmed

H217/2018

South Disouq wells

H217/2018

Analysts

Will Forbes

+44 (0)20 3077 5749

Elaine Reynolds

+44 (0)20 3077 5713

SDX Energy is a research client of Edison Investment Research Limited

SDX Energy has announced two successful well results in recent weeks, with additional oil discovered in Egypt and more net pay found in its first Moroccan gas well than expected. The next six months are busy ones for SDX, with eight more wells to be drilled in Morocco to supply a high value gas market. Two wells will be drilled in Egypt to delineate its existing South Disouq discovery and two exploration wells will target prospects that could materially increase the gas resources. In addition, programmes at NW Gemsa and Meseda should materially increase production. Our NAV increases from 64p to 65p/share (increases in absolute terms are partially offset by foreign exchange movements).

Year end

Revenue
($m)

PBT
($m)

Cash from operations ($m)

Net cash
($m)

Capex
($m)

12/15

11.4

11.1

(5.2)

8.2

(5.1)

12/16

12.9

(26.7)

(1.9)

4.7

(11.9)

12/17e

35.8

4.8

22.8

23.3

(22.7)

12/18e

54.9

20.2

34.5

16.1

(44.9)

Note: Figures are as reported

First operated Moroccan well better than expected

KSR-14 was the first well in Morocco to be drilled by SDX since its acquisition of the assets. As a result, the safe drilling operations and better than expected results (20m of net pay was encountered vs 10m expected) bodes well for the rest of the campaign. These results appear to suggest the target may contain at least 50% higher volumes than the 1bcf expected pre-drill. We believe the Kenitra market will be able to absorb all extra gas in the near term. The company is now guiding that the gas will start to flow at the end of Q118, giving time for additional sales and marketing activities to fit with the (high value) gas discovered.

Egypt: Rabul wells add nearer-term volumes

The company was committed to drill the two Rabul wells and we had not expected results to be material. However, the second well (Rabul-2) encountered significantly more net pay than anticipated. As a result, management expects the well will test much more than the 500bopd that Rabul-1 produced and add to production in the coming months (with limited additional costs). The oil is heavy (20° API) and for the moment, we expect the discovery to produce between 1-2mmbbls over time.

Valuation: Increased NAV to 65p/share

We have revised our modelling to include the incremental value from Rabul discovery wells, moving our NAV to 65p/share from 64p/share. We have not increased our expectations for Moroccan production for the moment, though expect to revisit this as more wells are drilled and results announced. The nine-well programme in Morocco could see a 50% increase in gas produced, which, due to prices and tax terms, is very high value. Investors could also see material value created by the four wells planned around the South Disouq discovery. Success could add multiples of the existing discovery reserves in time and feed an increase in production over the current expectations of 50mcfd from the SD-1x discovery.

Morocco

SDX has successfully drilled its first operated well in Morocco. The KSR-14 well encountered 20m of conventional net gas pay over four intervals. The well exceeded pre-drill estimates (around double the net pay) and should lead to an increase in reserves that can be exploited from this well. The well has yet to be tested, but given the numerous production wells already in the field, there should be a high degree of confidence in the well’s potential.

The Moroccan programme will continue with eight more wells due to be drilled before the end of Q118 (the majority of which are development wells). KSR-14 continues a string of good results in the Sebou permit, with a success rate over 80%. As a result of this, and the better than expected results in net pay, we believe investors should have a high level of comfort in SDX’s ability to increase production in Morocco from current levels (around 5.5-6.0mcfd) towards (and possibly over) 10mcfd.

These increasing volumes, the high gas prices ($9-12/mcf) achieved and the benevolent fiscal terms mean the programme should create meaningful cash flows for the company. The management has indicated it will look to contract discovered volumes before the end of Q118, which allows the required commercial sale agreements to be negotiated in conjunction with ever-increasing confidence on reserves.

Egypt: Rabul wells

We had not modelled volumes from the two commitment wells at Rabul, which means the positive results at Rabul-1 and Rabul-2 add to expected 2018 cash flows and value.

The initial results from the Rabul-1 well, which tested at 500bopd (and net pay of 14.5ft) were incremental. However, the net pay encountered at Rabul-2 of 101.5ft was much better and SDX expects the well (post cleanup and ESP installation) to produce up to 2,500bopd. The reservoir is high quality (porosity of around 20% and high permeability of c 1 Darcy), but the heavy oil (20° API) means relatively low recovery factors could be expected. For the moment, we have modelled the discovery as adding 1-2mmbbls to overall production.

Valuation

We have adjusted our modelling to include the value from production from the recent Rabul discovery, which should generate incremental production volumes from 2018 onwards. At this time, we have not increased our expectations for Moroccan gas despite the better results from KSR-14. For the moment, we await the results of the rest of the Moroccan well programme and indications from the company on its ability to sell any extra gas above and beyond our current modelling (we believe it should be able to). The inclusion of discovered Rabul volumes is partially offset by updated exchange rates. Our updated NAV is 65p/share (previously 64p/share).

Exhibit 1: Valuation summary

Asset

Number of shares: 204.5m

Recoverable reserves

Net risked value at 12.5% discount rate

Country

WI

CoS

Gross

Net WI

Net

NPV

Absolute

GBp/share

C$/share

 

%

%

mmboe

$/boe

$m

Net (debt)/cash – June 2017e

100%

100%

28

10.7

0.18

Cash in from equity raise

100%

100%

10

3.8

0.06

SG&A – NPV10 of 4 years

100%

100%

(10)

(4.0)

(0.07)

Receivable for gas and NGLs at Gemsa

100%

100%

8

3.3

0.05

Production

Meseda Base case + Rabul

Egypt

50%

100%

6.0

3.0

1.1

5.3

16

6.1

0.10

Meseda Base + Workovers + Rabul

Egypt

50%

90%

5.8

2.9

1.1

4.1

11

4.2

0.07

Gemsa 1P

Egypt

50%

100%

3.3

1.6

1.6

9.5

15

5.9

0.10

Gemsa 2P

Egypt

50%

100%

1.4

0.7

0.7

4.3

3

1.2

0.02

Sebou 2P

Morocco

75%

100%

1.2

0.9

0.9

22.9

21

8.1

0.13

Sebou - accelerated programme (updated)

Morocco

75%

80%

1.0

0.8

0.8

11.8

7

2.8

0.05

South Disouq SD-1X well - GCA estimate

Egypt

55%

85%

10.1

5.6

5.6

4.6

22

8.4

0.14

Acquired working capital (NPV of 4 yr release)

Morocco

100%

100%

9

3.3

0.06

Core NAV

 

 

 

28.8

15.5

11.8

6.1

139

53.7

0.89

Development upside

Meseda Base + Workovers + Waterflood + Rabul

Egypt

50%

50%

5.5

2.7

1.0

1.1

1

0.6

0.01

Gemsa - Edison modelling on full field

Egypt

50%

75%

1.6

0.8

0.8

4.3

3

1.0

0.02

Exploration (known)

SouthDisouq-Kelvin

Egypt

55%

41%

15.1

8.3

8.3

3.4

11

4.4

0.07

SouthDisouq-Bragg

Egypt

55%

41%

14.6

8.0

8.0

3.2

11

4.1

0.07

South Disouq Upside

Egypt

55%

25%

11.3

3.1

3.1

4.2

3

1.3

0.02

Full NAV

 

 

 

76.9

38.5

33.1

 

168

65.0

1.08

Source: Edison Investment Research

Financials

The company remains well financed, holding $28m in cash as of June 2017. The active operational programme the company is embarking on across all fronts in H217 and early 2018 should reap substantial gains in adding production and cash flows in time. Development drilling and field improvements in Morocco and Egypt add low-risk cash flows, while exploration wells (two in Morocco, two in Egypt) could add significant value.

Cashflows in 2018 will be affected by the success of the exploration and development campaign. If the two exploration wells at South Disouq are successful, the company will look to rightsize the production facilities and pipelines for the development, which may require the construction of a larger central processing unit (rather than a smaller rental unit). We would expect the company to be able to fund these expenditures from cash flows, although debt could be raised if required.

Exhibit 2: Financial summary

Accounts: IFRS; year end: December; US$000s

 

2014

2015

2016

2017e

2018e

Profit & loss

Total revenues

 

24,533

11,372

12,914

35,809

54,894

Cost of sales

 

(3,639)

(4,973)

(5,282)

(11,681)

(17,889)

Gross profit

 

20,894

6,399

7,632

24,128

37,005

SG&A (expenses)

 

(1,768)

(3,746)

(2,457)

(3,419)

(1,065)

Other income/(expense)

 

0

(3)

479

0

0

Exceptionals and adjustments

 

(3,831)

(7,676)

(29,089)

(1,000)

(1,000)

Depreciation and amortisation

 

(1,602)

(2,057)

(3,266)

(14,862)

(14,785)

Reported EBIT

 

13,693

(7,083)

(26,701)

4,848

20,156

Finance income/(expense)

 

(1,009)

(96)

4

0

0

Other income/(expense)

 

0

18,289

0

0

0

Reported PBT

 

 

12,684

11,110

(26,697)

4,848

20,156

Income tax expense (includes exceptionals)

 

 

(4,328)

(1,063)

(1,503)

(250)

(1,413)

Reported net income

 

 

8,356

10,047

(28,200)

4,598

18,743

End of period number of shares, m

 

 

376

38

80

204

204

 

 

 

 

 

 

 

 

Balance sheet

 

 

 

 

 

 

 

Property, plant and equipment

 

 

9,392

18,401

12,605

34,395

60,048

Intangible assets

 

 

16,460

23,473

10,623

8,695

13,188

Other non-current assets

 

 

1,999

2,106

2,503

2,879

2,879

Total non-current assets

 

 

27,851

43,980

25,731

45,969

76,115

Cash and equivalents

 

 

17,935

8,170

4,725

23,335

16,087

Inventories

 

 

0

1,188

1,698

1,698

2,600

Trade and other receivables

 

 

3,306

6,678

9,463

38,463

30,770

Other current assets

 

 

0

0

0

0

0

Total current assets

 

 

21,241

16,036

15,886

63,496

49,458

Non-current loans and borrowings

 

 

0

0

0

0

0

Other non-current liabilities

 

 

608

286

290

290

290

Total non-current liabilities

 

 

608

286

290

290

290

Trade and other payables

 

 

1,686

3,556

3,674

18,174

14,539

Current loans and borrowings

 

 

2,207

0

0

0

0

Other current liabilities

 

 

5,142

928

389

389

389

Total current liabilities

 

 

9,035

4,484

4,063

18,563

14,928

Equity attributable to company

 

 

39,449

55,246

37,264

90,612

110,354

 

 

 

 

 

 

 

 

Cash flow statement

 

 

 

 

 

 

 

Profit before tax

 

 

12,684

11,110

(26,697)

4,848

20,156

Depreciation and amortisation

 

 

1,602

2,057

3,266

14,862

14,785

Share based payments

 

 

1,064

761

(47)

1,000

1,000

Other adjustments

 

 

1,670

(12,281)

25,742

(1,156)

(3,135)

Movements in working capital

 

 

12,941

(2,183)

(3,440)

3,500

3,155

Income taxes paid

 

 

(4,430)

(4,678)

(766)

(250)

(1,413)

Cash from operations (CFO)

 

 

25,531

(5,214)

(1,942)

22,803

34,548

Capex

 

 

(13,634)

(5,120)

(11,890)

(22,724)

(44,930)

Acquisitions & disposals net

 

 

0

0

0

(30,000)

0

Other investing activities (includes associates)

 

 

1,110

4,836

825

781

3,135

Cash used in investing activities (CFIA)

 

(12,524)

(284)

(11,065)

(51,944)

(41,796)

Net proceeds from issue of shares

 

 

0

0

10,127

47,750

0

Movements in debt

 

 

0

(3,702)

(96)

0

0

Other financing activities

 

 

0

0

0

0

0

Cash from financing activities (CFF)

 

 

0

(3,702)

10,031

47,750

0

Increase/(decrease) in cash and equivalents

 

 

13,007

(9,200)

(2,976)

18,610

(7,248)

Currency translation differences and other

 

 

(615)

(565)

(469)

0

0

Cash and equivalents at end of period

 

17,935

8,170

4,725

23,335

16,087

Net (debt) cash

 

 

15,728

8,170

4,725

23,335

16,087

Movement in net (debt) cash over period

 

 

12,392

(7,558)

(3,445)

18,610

(7,248)

Source: Edison Investment Research, company accounts

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by SDX Energy and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Schumannstrasse 34b

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Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

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US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by SDX Energy and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Rank Group — Mecca digital picking up growth

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.

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