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Research: Consumer
Rank Group
Written by
Rank Group |
Key milestone reached |
New platform launch |
Travel & leisure |
11 March 2016 |
Share price performance
Business description
Next events
Analysts
Rank Group is a research client of Edison Investment Research Limited |
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The successful launch of its new digital platform, on time and budget, marks a key milestone for Rank and a major step towards its goal of a full omni-channel gaming product offering. Digital channels are the key growth driver for Rank and the new platform already offers new products and functionality, enabling Rank to further leverage its strong land-based gaming brands. After recent profit taking the FY16e EV/EBITDA is only 7.8x, yet the group is delivering good growth and strong cash flows.
Year end |
Revenue* (£m) |
EBITDA** |
PBT** |
EPS** |
DPS |
P/E |
Yield |
06/14 |
708 |
116.0 |
62.5 |
12.4 |
4.5 |
20.0 |
1.8 |
06/15 |
738 |
126.3 |
74.1 |
14.6 |
5.6 |
17.0 |
2.3 |
06/16e |
756 |
130.0 |
79.0 |
15.7 |
6.4 |
15.8 |
2.6 |
06/17e |
785 |
136.0 |
84.0 |
16.7 |
7.4 |
14.8 |
3.0 |
06/18e |
807 |
143.8 |
90.5 |
18.0 |
8.4 |
13.8 |
3.4 |
Note: *Revenue is before customer incentives. **EBITDA, PBT and EPS are normalised, excluding amortisation of acquired intangibles, one-off and exceptional items.
Successful platform migration
Rank’s stated goal was to migrate its digital brands from the OpenBet to Bede platform by end March; in fact, the switch-over occurred 11 days ago, with only minor hiccups, which were speedily resolved. The front-end is as yet little changed, minimising the risk of player churn, and already offers new games and payment options, with more to come from game suppliers such as Microgaming, Realistic, and Eyecon. In the iOS store, the new Mecca and Grosvenor apps are attracting favourable 4.5-5 star reviews, while Google Trends shows an encouraging uptick in search interest for Mecca Bingo, a key driver of site traffic. Grosvenor’s new digital poker product (from Microgaming) is now live and its new digital sports book (supplied by Kambi) is due to launch this summer.
Estimates unchanged
Rank reported interim results on 29 January and our forecasts are unchanged from those detailed in our Update report of the same date. We expect 7.5% EPS growth in FY16 and for net debt to decline to £42m by end June (and to have net cash by end FY18 in the absence of any acquisitions).
Valuation: Attractive risk-return profile
After a very strong performance in 2015, Rank shares ran into some profit taking between December and February and are almost 15% off their peak. The FY16e EV/EBITDA is now only 7.8x, well below the peer group average of 9.5x, yet the group is strongly cash generative, with a progressive dividend policy. We have long believed that successful platform migration should be a positive catalyst and while the group still faces technical challenges in its move towards a full omni-channel offering (hopefully by FY18), we believe that yesterday’s announcement is excellent news.
Financial summary
Exhibit 1: Financial summary
£m |
2014 |
2015 |
2016e |
2017e |
2018e |
||
Year end 30 June |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
707.7 |
738.3 |
756.0 |
785.0 |
807.0 |
Cost of Sales |
(409.2) |
(414.2) |
(426.0) |
(447.1) |
(460.6) |
||
Gross Profit |
298.5 |
324.1 |
330.0 |
337.9 |
346.4 |
||
EBITDA |
|
|
116.0 |
126.3 |
130.0 |
136.0 |
143.8 |
Operating Profit (before amort. and except.) |
72.4 |
84.0 |
85.0 |
89.5 |
96.0 |
||
Intangible Amortisation |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Exceptionals |
(46.5) |
2.1 |
6.0 |
0.0 |
0.0 |
||
Operating Profit |
25.9 |
86.1 |
91.0 |
89.5 |
96.0 |
||
Net Interest |
(9.9) |
(9.9) |
(6.0) |
(5.5) |
(5.5) |
||
Other finance adjustments* |
(1.6) |
(1.7) |
(1.0) |
0.0 |
0.0 |
||
Profit Before Tax (norm) |
|
|
62.5 |
74.1 |
79.0 |
84.0 |
90.5 |
Profit Before Tax (FRS 3) |
|
|
14.4 |
74.5 |
84.0 |
84.0 |
90.5 |
Tax on norm PBT |
(13.9) |
(17.0) |
(17.8) |
(18.9) |
(20.4) |
||
Profit After Tax (norm) |
48.6 |
57.1 |
61.2 |
65.1 |
70.1 |
||
Profit After Tax (FRS 3) |
0.5 |
57.5 |
66.2 |
65.1 |
70.1 |
||
Average Number of Shares Outstanding (m) |
390.7 |
390.7 |
390.7 |
390.7 |
390.7 |
||
EPS - normalised (p) |
|
|
12.4 |
14.6 |
15.7 |
16.7 |
18.0 |
EPS - (IFRS) (p) |
|
|
5.2 |
19.1 |
17.0 |
16.7 |
18.0 |
Dividend per share (p) |
4.50 |
5.60 |
6.40 |
7.40 |
8.40 |
||
Gross Margin (%) |
42.2 |
43.9 |
43.7 |
43.0 |
42.9 |
||
EBITDA Margin (%) |
16.4 |
17.1 |
17.2 |
17.3 |
17.8 |
||
Operating Margin (before GW and except.) (%) |
10.2 |
11.4 |
11.2 |
11.4 |
11.9 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
613.3 |
607.2 |
617.5 |
630.0 |
635.0 |
Intangible Assets |
390.2 |
395.7 |
400.0 |
410.0 |
415.0 |
||
Tangible Assets |
217.5 |
204.0 |
210.0 |
215.0 |
215.0 |
||
Deferred tax/other |
5.6 |
7.5 |
7.5 |
5.0 |
5.0 |
||
Current Assets |
|
|
87.9 |
123.4 |
109.0 |
115.5 |
119.0 |
Stocks |
3.1 |
2.8 |
3.0 |
3.5 |
4.0 |
||
Debtors |
37.7 |
31.0 |
35.0 |
37.0 |
40.0 |
||
Cash |
47.1 |
89.6 |
71.0 |
75.0 |
75.0 |
||
Other |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Current Liabilities |
|
|
(168.4) |
(309.7) |
(175.0) |
(197.5) |
(190.0) |
Creditors (incl provisions) |
(164.0) |
(184.5) |
(157.0) |
(167.5) |
(170.0) |
||
Short term borrowings |
(4.4) |
(125.2) |
(18.0) |
(30.0) |
(20.0) |
||
Long Term Liabilities |
|
|
(290.5) |
(126.5) |
(195.0) |
(139.0) |
(94.0) |
Long term borrowings |
(179.7) |
(17.3) |
(95.0) |
(54.0) |
(32.0) |
||
Other long term liabilities |
(110.8) |
(109.2) |
(100.0) |
(85.0) |
(62.0) |
||
Net Assets |
|
|
242.3 |
294.4 |
356.5 |
409.0 |
470.0 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
55.0 |
146.6 |
123.0 |
131.0 |
138.2 |
Net Interest |
(8.1) |
(7.5) |
(5.5) |
(5.0) |
(5.0) |
||
Tax |
(19.1) |
(2.2) |
(30.0) |
(16.8) |
(18.1) |
||
Capex |
(44.3) |
(31.9) |
(57.0) |
(45.0) |
(45.0) |
||
Acquisitions/disposals |
0.3 |
(1.0) |
6.0 |
0.0 |
0.0 |
||
Financing |
0.0 |
0.0 |
0.0 |
(2.5) |
(5.0) |
||
Dividends |
(16.4) |
(18.6) |
(22.7) |
(25.8) |
(28.9) |
||
Net Cash Flow |
(32.6) |
85.4 |
13.8 |
35.9 |
36.2 |
||
Opening net debt/(cash) |
|
|
104.1 |
137.0 |
52.9 |
42.0 |
9.0 |
HP finance leases initiated |
(2.3) |
(3.1) |
(3.0) |
(3.0) |
(3.0) |
||
Other |
2.0 |
1.8 |
0.1 |
0.0 |
(1.1) |
||
Closing net debt/(cash) |
|
|
137.0 |
52.9 |
42.0 |
9.0 |
(23.0) |
Source: Company data, Edison Investment Research. Note: *Unwinding of discount in disposal provisions, other financial gains and losses including FX.
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