Rank Group — Operational efficiencies keep forecasts intact

Consumer

Rank Group

Operational efficiencies keep forecasts intact

Interim results

Travel & leisure

1 February 2018

Price	227p
Market cap	£887m

Net cash (£m) at December 2017		£4.0m

Shares in issue	390.7m
Free float	29%
Code	RNK

Primary exchange	LSE
Secondary exchange	NA

Share price performance

%	1m	3m	12m
Abs	(6.0)	(4.6)	14.2
Rel (local)	(4.1)	(5.0)	6.5

52-week high/low

248.5p

201.7p

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

IMS	May 2018
FY results	August 2018

Analysts

Victoria Pease	+44 (0)20 3077 5740
Katherine Thompson		+44 (0)20 3077 5730

gaming@edisongroup.com

Edison profile page

Rank Group is a research client of Edison Investment Research Limited

Similar to last year’s trends, Rank reported that total Venues l-f-l revenues declined by 1%, mainly due to lower customer visits. This was offset by a 16% increase in Digital, where Mecca digital has clearly turned the corner. To reflect the lighter result in Venues, we have lowered our FY18 and FY19 revenue estimates by c 2-3%, but improved operational efficiencies mean that our profit forecasts are largely unchanged. The business model remains highly cash generative, with £4m net cash achieved at H118 and the stock’s trading multiples are attractive at 6.8x EV/EBITDA, 13.6x P/E and 8.1% free cash flow yield for CY18.

Year end	Revenue* (£m)	EBITDA** (£m)	PBT** (£m)	EPS** (p)	DPS (p)	P/E (x)	Yield (%)
06/16	753.0	128.2	77.4	15.4	6.5	14.7	2.9
06/17	755.1	128.8	79.3	16.3	7.3	13.9	3.2
06/18e	770.9	127.4	81.3	16.3	7.8	13.9	3.4
06/19e	792.1	134.2	87.2	17.6	8.4	12.9	3.7
06/20e	812.1	136.8	90.8	18.4	8.7	12.3	3.8

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

16% y-o-y digital growth

UK digital revenues increased by 16% y-o-y to £60.6m, split 40/60 between Grosvenor and Mecca digital, which grew by 27% and 9% respectively. Sequentially, grosvenorcasinos.com was flat vs H217, but we are encouraged by the sustained growth in Mecca digital, suggesting that previous platform complications are now fully resolved. The new point of consumption tax (POCT) on free bets affected profits by c £1m, leading to a H118 digital operating margin of 18.8%, compared to 13.9% in H117 and 26.1% in H217. A mecca TV campaign launched in December is expected to boost H218 revenues and we now anticipate FY18 digital revenues of £128.6m, with an operating margin of 18.6%. This compares to our previous digital estimates of £132.4m and 18.8% margin.

Operational efficiencies boost Venues margins

Lower customer visits, a weaker win margin and a challenging economic backdrop all contributed to 1% and 3% l-f-l declines in Grosvenor and Mecca Venues revenues. However, this has been fully mitigated by continued cost-cutting and operational efficiencies across the estate. For the group altogether, we have lowered our FY18 and FY19 revenue estimates by 2-3%, but our operating profit forecasts remain broadly unchanged. We introduce FY20 estimates, with digital comprising 20% of revenues and 24% of operating profit (vs 16%/20% in H118).

Valuation: 6.8x CY18 EV/EBITDA below peers

Rank’s CY18 EV/EBITDA multiple of 6.8x is below the peer average of 9.3x. 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.

1% Venues l-f-l decline but profits intact

H118 results highlights

Revenues: Continuation of previous trends, flat at £397.6m

■

Divisionally, Grosvenor Venues revenue declined 2.4% to £197.2m and Mecca Venues declined by 3.6% to £104.1m. Enracha revenues grew 9.3% to £17.7m, marginally below our expectations. Total Venues l-f-l revenues declined by 1% to 319.0m.

■

Digital revenues increased by 15.6% to £60.6m, driven by 26.9% growth in grosvenorcasinos.com and 9.1% growth in Mecca digital. Sequentially, grosvenorcasinos.com was flat and Mecca digital increased by 4.6%.

Profit: In line with expectations, due to efficiencies

■

As detailed below, efficiencies across the estate offset the l-f-l decline in Venues revenues. Total cost savings in the period amounted to £6.6m. H118 group operating profit before exceptional items of £41.7m was in line with expectations and compares to £36.6m in the prior year.

■

Adjusted EPS grew 16% to 8.0p. Reported EPS declined 11% to 6.4p, on the back of £7.5m of predominately non-cash exceptional items (underperformance of the Dundee and Didsbury casinos, an onerous lease provision and restructuring costs).

Net cash achieved at H118, earlier than expected

■

Rank Group achieved £4.0m net cash in the period. This is slightly earlier than expected, due to lower capex spend. Management has now guided to FY18 capex of £46-48m vs previous estimates of £50-55m, partly due to no further Luda rollout plans this year. We believe most of the additional capex (ex Luda) will be rolled forward into FY19.

Outlook: Digital to pick up with TV campaign

■

For the four-week period to 28 January, trading has been in line with management’s expectations and the company remains confident for the FY18 outlook.

■

Venues: Key trends are the continuation of the refurbishments, numerous cost-savings programmes, investment into regulatory initiatives, and the improvement of the Luda model. For H218, we expect Venues revenues to be slightly higher, with a pick up in the London casinos.

■

Digital: The launch of the single wallet, luda.com and bellacasino, as well as an ongoing Mecca TV campaign should lead to sustained revenue growth in H218. The POCT on free bets affected profits by £1m in H118 and is expected to be c £3.3m for the full year. We now anticipate FY18 digital revenues of £128.6m, with an operating margin of 18.6%. This compares to our previous digital estimates of £132.4m and 18.8% margin.

Grosvenor Venues: 52% of revenues

Revenues declined by 2% to £197.2m (-1% on a l-f-l basis), affected by another slightly below-average win margin, lower visitor numbers and a challenging economic backdrop. The gaming margin was 0.7% lower than the rolling five-year average. Tighter customer due diligence checks and refurbishment work in two London venues contributed to a 7% decline in customer visits (to 3.67m).

London revenues declined from £72.0m to £67.1m, with an operating margin of 18.2% (vs 18.8% last year). Excluding the refurbishments at the Golden Horseshoe and Piccadilly casinos, revenues would have been broadly flat in the period and management believes growth opportunities are now positive in London.

Visits in the provinces declined by 6%, but a higher win margin led to a 2.1% increase in provinces revenues (£124.2m), with an operating profit margin of 13.8% (vs 9.4% in the prior period).

We have lowered our FY18 Grosvenor Venues revenue forecast from £403.0m to £398.2m, but kept our FY18 operating profit estimate broadly unchanged at £60.6m (vs £60.7m), due to the successful cost savings programme. Our FY19 revenue forecast goes from £410.8m to £402.2m, with an operating profit of £62.6m (vs £63.0m previously).

Rank has been lobbying for an increase in the number of machines permitted in casinos, but following the government’s triennial review into stakes and prizes, we do not anticipate any changes in the foreseeable future. This essentially removes a potential significant upside catalyst for the stock.

Mecca Venues (27% of revenues)

Mecca Venues H118 revenues declined 4% to £104.1m, partly due to the closure of two clubs. Like-for-like revenue was down 3% due to a 7% decline in customer visits.

To compensate for the industry trend of declining customers, Rank is implementing robust cost control, as well as improved service and better upselling to increase spend per visit, which rose 4% to £20.92 in H118. Consequently, operating profit was £12.7m (-5% y-o-y), slightly above our expectations.

The first three Luda sites have been launched, with varying degrees of success. The site in Walsall in particular has not performed as well as hoped. Management intends to provide further information at the full year results (August) and, in the meantime, no further sites are expected to be developed in 2018.

We have lowered FY18 and FY19 Mecca Venues revenues by c 3%, largely to reflect a lower contribution from Luda. However, given the strong margin performance in H118, we have raised our FY18 operating profit estimate from £24.0m to £25.5m.

UK Digital (16% of revenues): Mecca has turned the corner

Total UK digital revenues increased by c 16% to £60.6m. Compared to the prior year, grosvenorcasinos.com revenues increased by 27% to £24.5m, although we note that this was flat vs H217. At present, only 3.4% of Grosvenor Venues’ customers play at grosvenorcasinos.com and this is a key cross-sell opportunity. In the period, the company has launched ‘dual play’, the live streaming of roulette from Grosvenor Victoria’s casino to the group’s digital channel. The piloting of the ‘Grosvenor One’ single wallet is now complete and management still expects to launch the product in mid-2018. Combined with a new slots-led digital casino brand ‘bellacasino’ (to be launched in February), we expect sustained growth going forward.

Meccabingo.com revenues increased by 9% from £33.1m to £36.1m compared to £34.5m in H217. A more targeted marketing programme has driven higher revenue per user in meccabingo.com, although this has led to a 5% fall in digital customer users. Looking forward, a new integrated marketing campaign (‘Meccarena’ TV advert) was launched on Boxing Day and, to date, customer trends have been very positive. Furthermore, luda.com is due to be launched later this year.

Our FY18 digital revenue forecast goes from £132.4m to £128.6m, which represents y-o-y growth of 15.3% (£54.5m grosvenorcasinos.com; £74.1m from meccabingo.com). We have lowered our FY19 digital revenue estimate from £154.0m to £145.4m.

A digital operating margin of 18.8% in H118 compares to 13.9% in the prior year and 26.1% in H217. Management paid c £1m of additional POCT in the period, with payments commencing in October. The full-year impact of POCT is expected to be c £3.3m. We conservatively assume a steady 18.6% margin going forward, to allow for the full impact of taxes, which largely offset efficiencies and benefits of scale.

Enracha (5% of revenues)

Enracha revenues grew from £16.2m to £17.7m in H118, with an operating profit of £2.6m vs £2.9m in the prior period. Margins were affected by the launch of new products and we anticipate similar costs for the remainder of the year. In constant currency, revenues and operating profit increased by 6% and 9% respectively.

We have lowered our FY18 and FY19 revenue estimates by c 2% and c 3% respectively, while our FY18e operating profit estimate goes from £6.4m to £5.4m.

Changes to forecasts

Following the revisions our updated group and divisional estimates are presented in exhibit below.

Exhibit 1: Summary divisional forecasts

Year to June £m	FY15	H116	H216	FY16	H117	H217	FY17	H118	H218	FY18e	FY19e	FY20e
Grosvenor venues	401.1	205.1	203.0	408.1	202.0	195.2	397.2	197.2	201.0	398.2	402.2	406.1
Mecca venues	224.4	109.8	111.7	221.5	108.0	105.6	213.6	104.1	104.5	208.6	207.0	207.0
grosvenorcasinos.com	22.3	13.9	16.6	30.5	19.3	24.6	43.9	24.5	30.0	54.5	65.4	75.2
meccabingo.com	65.2	33.2	33.0	66.2	33.1	34.5	67.6	36.1	38.0	74.1	80.0	84.8
Digital	87.5	47.1	49.6	96.7	52.4	59.1	111.5	60.6	68.0	128.6	145.4	160.0
Enracha	25.3	12.2	14.5	26.7	16.2	16.6	32.8	17.7	17.8	35.5	37.5	39.0
Revenue*	738.3	374.2	378.8	753.0	378.6	376.5	755.1	379.6	391.3	770.9	792.1	812.1
Grosvenor venues	87.1	43.0	40.8	83.8	38.8	37.8	76.6	41.4	42.2	83.6	86.6	87.5
Mecca venues	41.6	20.8	21.9	42.7	19.2	22.6	41.8	18.6	18.7	37.3	37.0	36.5
Digital	20.2	10.1	8.7	18.8	10.1	17.7	27.8	13.5	14.6	28.1	31.5	35.2
Enracha	4.1	2.2	2.9	5.1	3.7	4.0	7.7	3.4	3.6	6.9	8.1	8.5
Central costs	(26.7)	(13.4)	(8.8)	(22.2)	(12.1)	(13.0)	(25.1)	(13.6)	(15.0)	(28.5)	(29.0)	(30.9)
EBITDA	126.3	62.7	65.5	128.2	59.7	69.1	128.8	63.3	64.1	127.4	134.2	136.8
EBITDA margin %	17.1%	16.8%	17.3%	17.0%	15.8%	18.4%	17.1%	16.7%	16.4%	16.5%	16.9%	16.8%
Depreciation/amortisation	(42.3)	(22.3)	(23.5)	(45.8)	(23.1)	(22.2)	(45.3)	(21.6)	(22.0)	(43.6)	(45.0)	(45.0)
Grosvenor venues	63.4	30.9	30.0	60.9	26.1	26.0	52.1	30.1	30.5	60.6	62.6	63.5
Mecca venues	28.9	14.3	18.6	32.9	13.3	16.6	29.9	12.7	12.8	25.5	25.0	24.5
UK digital	17.2	8.0	5.9	13.9	7.3	15.4	22.7	11.4	12.5	23.9	27.0	29.8
Enracha	2.6	1.4	2.2	3.6	2.9	3.3	6.2	2.6	2.8	5.4	6.6	7.0
Central costs	(28.1)	(14.2)	(14.7)	(28.9)	(13.0)	(14.4)	(27.4)	(15.1)	(16.5)	(31.6)	(32.0)	(33.0)
Operating profit (norm)	84.0	40.4	42.0	82.4	36.6	46.9	83.5	41.7	42.1	83.8	89.2	91.8
Group margin	11.4%	10.8%	11.1%	10.9%	9.7%	12.5%	11.1%	11.0%	10.8%	10.9%	11.3%	11.3%
Net interest	(9.9)	(3.0)	(2.0)	(5.0)	(2.1)	(2.1)	(4.2)	(1.5)	(1.0)	(2.5)	(2.0)	(1.0)
Profit before tax (norm)	74.1	37.4	40.0	77.4	34.5	44.8	79.3	40.2	41.1	81.3	87.2	90.8

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

■

Revenues: On the back of l-f-l declines in Venues, as well as slightly lower than expected growth in grosvenorcasinos.com, we have lowered our headline revenue forecasts by 1.8% in FY18 and 3.0% in FY19.

■

Normalised operating profit: Better cost efficiencies across Venues and Central costs mean that our FY18e group operating profit increases 0.8% to £83.8m. Our FY19e operating profit forecast moves from £89.7m to £89.2m.

■

Net debt: Management is guiding to FY18 capex of £46-48m, vs its previous estimates of £50-55m. This is partly due to fewer than expected Luda sites. The core business remains highly cash-generative and the company achieved net cash of £4.0m at 1H18. We forecast FY18 net cash of £9.2m.

■

Introducing FY20 estimates: Our FY20 estimates continue the trend of broadly flat revenues in Venues offset by 10% growth in Digital. We estimate a steady group operating margin of 11.3%.

Exhibit 2: Estimate changes

	Revenue*			Operating profit**			EPS** (p)
£m	Old	New	% chg.	Old	New	% chg.	Old	New	% chg.
06/18e	785.4	770.9	(1.8)	83.1	83.8	0.8	16.1	16.3	1.2
06/19e	816.4	792.1	(3.0)	89.7	89.2	(0.6)	17.5	17.6	(0.6)

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

Exhibit 3: 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	770.9	792.1	812.1
Cost of Sales		(409.2)	(414.2)	(418.8)	(439.3)	(443.5)	(450.3)	(461.6)
Gross Profit		298.5	324.1	334.2	315.8	327.4	341.8	350.6
EBITDA		116.0	126.3	128.2	128.8	127.4	134.2	136.8
Operating Profit (before amort. and except.)		72.4	84.0	82.4	83.5	83.8	89.2	91.8
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	76.3	89.2	91.8
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	81.3	87.2	90.8
Profit Before Tax (FRS 3)		14.4	74.5	85.6	79.7	73.9	87.2	90.8
Tax on norm PBT		(13.9)	(17.0)	(17.4)	(15.6)	(17.6)	(18.3)	(19.1)
Profit After Tax (norm)		48.6	57.1	60.0	63.7	63.7	68.9	71.7
Profit After Tax (FRS 3)		0.5	57.5	68.2	64.1	56.3	68.9	71.7

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	16.3	17.6	18.4
EPS - (IFRS) (p)		5.2	19.1	18.2	16.1	14.7	17.6	18.4
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	42.5	43.2	43.2
EBITDA Margin (%)		16.4	17.1	17.0	17.1	16.5	16.9	16.8
Operating Margin (before GW and except.) (%)		10.2	11.4	10.9	11.1	10.9	11.3	11.3

BALANCE SHEET
Fixed Assets		613.3	607.2	614.1	606.0	600.5	607.5	615.5
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	186.0	192.0
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	109.9	104.0	126.7
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	73.7	65.6	88.3
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	395.9	432.5	463.2

CASH FLOW
Operating Cash Flow		55.0	146.6	110.2	116.3	116.4	125.2	127.8
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)	(16.3)	(17.4)	(18.2)
Capex		(44.3)	(31.9)	(52.7)	(42.7)	(46.0)	(52.0)	(52.0)
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	23.5	23.4	24.7
Opening net debt/(cash)		104.1	137.0	52.9	41.2	12.4	(9.2)	(30.6)
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	(9.2)	(30.6)	(53.3)

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

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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.

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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

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

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

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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