Weakness in Grosvenor affects EBIT

Rank Group 6 April 2018 Update
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Rank Group

Weakness in Grosvenor affects EBIT

Trading update

Travel & leisure

6 April 2018

Price

180.0p

Market cap

£703m

Net cash (£m) at end December 2017

4.0

Shares in issue

390.7m

Free float

29%

Code

RNK

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(18.9)

(26.5)

(14.4)

Rel (local)

(19.6)

(21.2)

(13.7)

52-week high/low

248.50p

180.0p

Business description

Rank Group is a gaming-based leisure and entertainment company. Its Grosvenor and Mecca brands are market leaders in UK multi-channel gaming and it also has operations in Spain and Belgium. In FY17 85% of revenues came from its venues and 15% from its digital operations.

Next events

FY18 results

16 August 2018

Analysts

Victoria Pease

+44 (0)20 3077 5700

Katherine Thompson

+44 (0)20 3077 5730

Rank Group is a research client of Edison Investment Research Limited

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.

Year
end

Revenue*
(£m)

EBITDA**
(£m)

PBT**
(£m)

Dil. EPS**
(p)

DPS
(p)

P/E
(x)

Yield
(%)

06/16

753.0

128.2

77.4

15.4

6.5

11.7

3.6

06/17

755.1

128.8

79.3

16.2

7.3

11.1

4.1

06/18e

754.0

120.0

73.9

14.7

7.8

12.2

4.3

06/19e

774.8

125.0

78.0

15.7

8.4

11.5

4.7

06/20e

793.9

127.5

81.5

16.4

8.7

11.0

4.9

Note: *Revenue is before customer incentives. **Normalised, excluding amortisation of acquired intangibles, one-off and exceptional items.

Q3 hit by bad weather and weaker consumer sentiment

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.

Changes to forecasts

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.

Valuation: 5.7x CY18e EV/EBITDA

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.

Exhibit 1: Financial summary

£'m

2014

2015

2016

2017

2018e

2019e

2020e

June

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue*

 

 

707.7

738.3

753.0

755.1

754.0

774.8

793.9

Cost of Sales

(409.2)

(414.2)

(418.8)

(439.3)

(434.3)

(440.9)

(451.7)

Gross Profit

298.5

324.1

334.2

315.8

319.7

333.8

342.2

EBITDA

 

 

116.0

126.3

128.2

128.8

120.0

125.0

127.5

Operating Profit (before amort. and except.)

72.4

84.0

82.4

83.5

76.4

80.0

82.5

Intangible Amortisation

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

(46.5)

2.1

9.3

1.0

(7.5)

0.0

0.0

Operating Profit

25.9

86.1

91.7

84.5

68.9

80.0

82.5

Net Interest

(9.9)

(9.9)

(5.0)

(4.2)

(2.5)

(2.0)

(1.0)

Other finance adjustments

(1.6)

(1.7)

(1.1)

(0.6)

0.1

0.0

0.0

Profit Before Tax (norm)

 

 

62.5

74.1

77.4

79.3

73.9

78.0

81.5

Profit Before Tax (FRS 3)

 

 

14.4

74.5

85.6

79.7

66.5

78.0

81.5

Tax on norm PBT

(13.9)

(17.0)

(17.4)

(15.6)

(16.1)

(16.4)

(17.1)

Profit After Tax (norm)

48.6

57.1

60.0

63.7

57.8

61.6

64.4

Profit After Tax (FRS 3)

0.5

57.5

68.2

64.1

50.4

61.6

64.4

Average Number of Shares Outstanding (m)

390.7

390.7

390.7

390.7

390.7

390.7

390.7

EPS - normalised (p)

 

 

12.4

14.6

15.4

16.3

14.8

15.8

16.5

EPS - normalised diluted (p)

 

 

12.4

14.6

15.4

16.2

14.7

15.7

16.4

EPS - (IFRS) (p)

 

 

5.2

19.1

18.2

16.1

13.2

15.8

16.5

Dividend per share (p)

4.5

5.6

6.5

7.3

7.8

8.4

8.7

Gross Margin (%)

42.2

43.9

44.4

41.8

42.4

43.1

43.1

EBITDA Margin (%)

16.4

17.1

17.0

17.1

15.9

16.1

16.1

Operating Margin (before GW and except.) (%)

10.2

11.4

10.9

11.1

10.1

10.3

10.4

BALANCE SHEET

Fixed Assets

 

 

613.3

607.2

614.1

606.0

600.5

600.5

601.5

Intangible Assets

390.2

395.7

404.3

411.5

412.5

413.5

414.5

Tangible Assets

217.5

204.0

202.0

187.9

180.0

179.0

178.0

Deferred tax/other

5.6

7.5

7.8

6.6

8.0

8.0

9.0

Current Assets

 

 

87.9

123.4

100.5

107.4

109.0

102.7

125.0

Stocks

3.1

2.8

2.9

2.8

3.2

3.4

3.4

Debtors

37.7

31.0

36.6

25.6

33.0

35.0

35.0

Cash

47.1

89.6

61.0

79.0

72.8

64.3

86.6

Other

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Current Liabilities

 

 

(168.4)

(309.4)

(173.9)

(186.2)

(184.5)

(189.0)

(189.0)

Creditors (incl provisions)

(164.0)

(184.5)

(159.5)

(151.6)

(170.0)

(174.0)

(174.0)

Short term borrowings

(4.4)

(124.9)

(14.4)

(34.6)

(14.5)

(15.0)

(15.0)

Long Term Liabilities

 

 

(290.5)

(126.8)

(188.1)

(136.6)

(130.0)

(90.0)

(90.0)

Long term borrowings

(179.7)

(17.6)

(87.8)

(57.0)

(50.0)

(20.0)

(20.0)

Other long term liabilities

(110.8)

(109.2)

(100.3)

(79.6)

(80.0)

(70.0)

(70.0)

Net Assets

 

 

242.3

294.4

352.6

390.6

395.0

424.2

447.5

CASH FLOW

Operating Cash Flow

 

 

55.0

146.6

110.2

116.3

109.0

116.0

118.5

Net Interest

(8.1)

(7.5)

(5.0)

(3.0)

(2.0)

(1.5)

(0.5)

Tax

(19.1)

(2.2)

(31.1)

(14.7)

(14.8)

(15.6)

(16.3)

Capex

(44.3)

(31.9)

(52.7)

(42.7)

(41.0)

(45.0)

(45.0)

Acquisitions/disposals

0.3

(1.0)

16.2

0.0

0.0

0.0

0.0

Financing

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Dividends

(16.4)

(18.6)

(22.7)

(26.0)

(28.6)

(30.9)

(32.4)

Net Cash Flow

(32.6)

85.4

14.9

29.9

22.6

23.0

24.3

Opening net debt/(cash)

 

 

104.1

137.0

52.9

41.2

12.4

(8.3)

(29.3)

HP finance leases initiated

(2.3)

(3.1)

(2.8)

(1.3)

(2.0)

(2.0)

(2.0)

Other

2.0

1.8

(0.4)

0.2

0.0

0.0

0.0

Closing net debt/(cash)

 

 

137.0

52.9

41.2

12.4

(8.3)

(29.3)

(51.6)

Source: Rank Group, Edison Investment Research *Note: Revenue is before customer incentives

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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Rank Group 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 Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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 2018. “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 4, 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 4, 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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Rank Group 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 Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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 2018. “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 4, 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 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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