Rank Group — Mecca digital picking up growth

Rank Group (LSE: RNK)

Last close As at 22/06/2024

73.00

0.80 (1.11%)

Market capitalisation

GBP342m

More on this equity

Research: Consumer

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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Consumer

Rank Group

Mecca digital picking up growth

AGM trading update

Travel & leisure

19 October 2017

Price

229.6p

Market cap

£897m

Net debt (£m) at end June 2017

12.4

Shares in issue

390.7m

Free float

29%

Code

RNK

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.0

3.4

20.0

Rel (local)

(1.0)

1.1

10.3

52-week high/low

243.5p

186.8p

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

Interim results

1 February 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

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.

Year
end

Revenue*
(£m)

EBITDA**
(£m)

PBT**
(£m)

EPS**
(p)

DPS
(p)

P/E
(x)

Yield
(%)

06/15

738.3

126.3

74.1

14.6

5.6

15.7

2.4

06/16

753.0

128.2

77.4

15.4

6.5

14.9

2.8

06/17

755.1

128.8

79.3

16.3

7.3

14.1

3.2

06/18e

785.4

131.1

79.6

16.1

8.1

14.3

3.5

06/19e

816.4

137.7

86.7

17.5

8.8

13.1

3.8

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

19% digital growth is the highlight

Rank Group is beginning to reap the rewards from the online potential in the business, with 34% growth in Grosvenor digital and 11% growth in Mecca digital. This compares to 43.9% and 2.1% in FY17 respectively. The growth in Mecca digital is particularly encouraging, after the difficult start to this business in 2016. For the full year, we forecast total digital growth of 18.7% to £132.4m, equating to 16.9% of total revenues. The launch of the single wallet is expected in mid-2018.

Venues: reorganisation for FY18 turnaround

Similar to FY17 results, Venues’ l-f-l revenues declined by 1%. Driven by a lower than average win margin, Grosvenor Casinos’ l-f-l revenues declined by 1% and Mecca Venues were down 2% (vs -1% and -3% at FY17). As detailed in our June Capital Markets update, Rank is implementing numerous cost-savings plans and reinvigoration initiatives across the estate and the group is now creating a single leadership team across the retail businesses, allowing for improved synergies. Management has reiterated FY18 expectations and we forecast a return to growth in Grosvenor in FY18 (1.5% to £403m), with flat revenues in Mecca (£214m).

Valuation: 6.8x CY18e EV/EBITDA

Rank’s CY18e EV/EBITDA of 6.8x is meaningfully below the peer average. Although it is more affected by retail challenges than its pure online peers, there is considerably more digital upside. From the current triennial review, Rank faces none of the fixed odds betting terminal (FOBT) risks and might even benefit if it is allowed more machines (as detailed in our UK Gaming Sector report). An expected move into net cash by CY18 underpins a progressive dividend policy and provides the firepower for potential M&A.

Exhibit 1: Financial summary

£'m

2014

2015

2016

2017

2018e

2019e

June

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

707.7

738.3

753.0

755.1

785.4

816.4

Cost of Sales

(409.2)

(414.2)

(418.8)

(439.3)

(449.9)

(463.4)

Gross Profit

298.5

324.1

334.2

315.8

335.5

353.0

EBITDA

 

 

116.0

126.3

128.2

128.8

131.1

137.7

Operating Profit (before amort. and except.)

72.4

84.0

82.4

83.5

83.1

89.7

Intangible Amortisation

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

(46.5)

2.1

9.3

1.0

0.0

0.0

Operating Profit

25.9

86.1

91.7

84.5

83.1

89.7

Net Interest

(9.9)

(9.9)

(5.0)

(4.2)

(3.5)

(3.0)

Other finance adjustments*

(1.6)

(1.7)

(1.1)

(0.6)

0.0

0.0

Profit Before Tax (norm)

 

 

62.5

74.1

77.4

79.3

79.6

86.7

Profit Before Tax (FRS 3)

 

 

14.4

74.5

85.6

79.7

79.6

86.7

Tax on norm PBT

(13.9)

(17.0)

(17.4)

(15.6)

(16.7)

(18.2)

Profit After Tax (norm)

48.6

57.1

60.0

63.7

62.9

68.5

Profit After Tax (FRS 3)

0.5

57.5

68.2

64.1

62.9

68.5

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

16.3

16.1

17.5

EPS - (IFRS) (p)

 

 

5.2

19.1

18.2

16.1

16.1

17.5

Dividend per share (p)

4.5

5.6

6.5

7.3

8.1

8.8

Gross Margin (%)

42.2

43.9

44.4

41.8

42.7

43.2

EBITDA Margin (%)

16.4

17.1

17.0

17.1

16.7

16.9

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

10.2

11.4

10.9

11.1

10.6

11.0

BALANCE SHEET

Fixed Assets

 

 

613.3

607.2

614.1

606.0

611.4

615.4

Intangible Assets

390.2

395.7

404.3

411.5

412.5

413.5

Tangible Assets

217.5

204.0

202.0

187.9

190.9

193.9

Deferred tax/other

5.6

7.5

7.8

6.6

8.0

8.0

Current Assets

 

 

87.9

123.4

100.5

107.4

106.7

106.6

Stocks

3.1

2.8

2.9

2.8

3.2

3.4

Debtors

37.7

31.0

36.6

25.6

30.0

35.0

Cash

47.1

89.6

61.0

79.0

73.5

68.2

Other

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)

Creditors (incl provisions)

(164.0)

(184.5)

(159.5)

(151.6)

(170.0)

(174.0)

Short term borrowings

(4.4)

(124.9)

(14.4)

(34.6)

(14.5)

(15.0)

Long Term Liabilities

 

 

(290.5)

(126.8)

(188.1)

(136.6)

(130.0)

(90.0)

Long term borrowings

(179.7)

(17.6)

(87.8)

(57.0)

(50.0)

(20.0)

Other long term liabilities

(110.8)

(109.2)

(100.3)

(79.6)

(80.0)

(70.0)

Net Assets

 

 

242.3

294.4

352.6

390.6

403.6

443.0

CASH FLOW

Operating Cash Flow

 

 

55.0

146.6

110.2

116.3

125.1

131.7

Net Interest

(8.1)

(7.5)

(5.0)

(3.0)

(3.0)

(2.5)

Tax

(19.1)

(2.2)

(31.1)

(14.7)

(15.9)

(17.3)

Capex

(44.3)

(31.9)

(52.7)

(42.7)

(52.0)

(52.0)

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)

(26.0)

(30.9)

(33.6)

Net Cash Flow

(32.6)

85.4

14.9

29.9

23.3

26.3

Opening net debt/(cash)

 

 

104.1

137.0

52.9

41.2

12.4

(9.0)

HP finance leases initiated

(2.3)

(3.1)

(2.8)

(1.3)

(2.0)

(2.0)

Other

2.0

1.8

(0.4)

0.2

0.0

(0.0)

Closing net debt/(cash)

 

 

137.0

52.9

41.2

12.4

(9.0)

(33.2)

Source: Rank Group accounts, 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 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 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 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

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 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 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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