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Market capitalisation
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Research: Consumer
Rank Group
Written by
Rank Group |
Grosvenor leads the way |
IMS (19 weeks to 8 May) |
Travel & leisure |
12 May 2016 |
Share price performance
Business description
Next events
Analysts
Rank Group is a research client of Edison Investment Research Limited |
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Rank’s 10-month IMS showed a solid performance in its venues and strong growth in Grosvenor digital, an important growth driver for the group. News of softer trading in Mecca digital since the recent platform migration is slightly disappointing, but it is early days and Rank has good organic growth prospects as it moves towards a true multi-channel offering, potentially augmented by acquisitions if the right opportunities arise. Our profit estimates are unchanged and the balance sheet is very strong. The 2016e EV/EBITDA of only 7.3x looks too low.
Year end |
Revenue* |
EBITDA** |
PBT** |
EPS** |
DPS |
P/E |
Yield |
06/14 |
707.7 |
116.0 |
62.5 |
12.4 |
4.5 |
19.1 |
1.9 |
06/15 |
738.3 |
126.3 |
74.1 |
14.6 |
5.6 |
16.3 |
2.4 |
06/16e |
756.0 |
130.0 |
79.0 |
15.7 |
6.4 |
15.1 |
2.7 |
06/17e |
785.0 |
136.0 |
84.0 |
16.7 |
7.4 |
14.2 |
3.1 |
06/18e |
808.0 |
143.8 |
90.5 |
18.0 |
8.4 |
13.2 |
3.5 |
Note: *Revenue is before customer incentives. **EBITDA, PBT and EPS are normalised, excluding amortisation of acquired intangibles, one-off and exceptional items.
Mixed progress so far since platform migration
Rank’s digital brands migrated from OpenBet to the new Bede platform on time and on budget at the end of February. The platform is designed to provide a better player experience (eg new games and payment options) and improve cross-selling (eg better bonusing and player tracking features). It has worked well for Grosvenor with digital revenues up 35% in the 19 weeks to 8 May, but Mecca digital (where player numbers are much higher) saw a 5% decline due to some disruption caused by the migration. Mecca’s platform has been more stable in recent weeks and with new content and functionality now being added, we expect to see an improving trend at the time of Rank’s final results on 18 August.
Forecasts unchanged, EPS up 8% in 2016e
Rank’s results are still dominated by its land-based businesses: 87% of our FY16e revenues (FY15: 88%). These are performing slightly ahead of our expectations (eg Mecca venues l-f-l revenues up 3%). Thus although our revenue mix has altered marginally (towards venues) our profit estimates are unchanged, with FY16e EBITDA at £130m (up 3%). The business remains strongly cash generative, with estimated net debt of £42m at June 2016 forecast to swing to net cash by end FY18 (in the absence of any acquisitions) despite a progressive dividend policy.
Valuation: Price weakness presents opportunity
After a strong performance in 2015 Rank’s shares have drifted back by 17% in 2016. The calendarised 2016e EV/EBITDA is now only 7.3x, a material discount to the peer group, and our sum-of-the-parts is a range of 252p to 302p per share.
Trading update: H216 (19 weeks to 8 May)
Exhibit 1 shows the trend in like-for-like (l-f-l) revenues, up 3% so far in H216 (19 weeks). Total revenues (right-hand column) are 2% higher (reflecting the previously reported closures of a small number of underperforming units). Exhibit 2 details our estimates: we now expect total digital revenues of £96m in FY16 (previous estimate £100m) but this is offset by a small increase in venues revenues; our profit forecasts are unchanged.
Exhibit 1: Like-for-like revenue growth
L-f-l revenue growth |
H115 |
FY15 |
H116 |
H216* |
H216* Total |
Grosvenor venues |
3% |
6% |
5% |
2% |
1% |
Grosvenor digital |
71% |
65% |
40% |
35% |
35% |
Total Grosvenor brand |
5% |
8% |
7% |
4% |
3% |
Mecca venues |
(1)% |
0% |
2% |
3% |
0% |
Mecca digital |
6% |
11% |
5% |
(5)% |
(5)% |
Total Mecca brand |
1% |
2% |
3% |
1% |
(1)% |
Total |
4% |
5% |
5% |
3% |
2% |
Venues revenue |
1% |
2% |
2% |
2% |
1% |
Digital revenue |
16% |
21% |
14% |
6% |
6% |
Total |
4% |
5% |
5% |
3% |
2% |
Source: Rank Group, Edison Investment Research. Note: *19 weeks to 8 May 2016.
Grosvenor casinos
The 35% increase in digital revenues is an excellent result given the platform migration and relatively strong comparatives. Grosvenor has improved both its product offering and marketing to capitalise on its cross-selling opportunity: less than 3% of its venues’ customers play at grosvenorcasinos.com yet 25% of them are estimated to play online. Its UK market share is less than 2% and management’s medium-term goal is more like 10% (implying substantial upside and revenues of over £100m). The next six months should benefit from the recently launched digital poker product as well as the new digital sports book from Kambi (which will hopefully be soft-launched before the FIFA Euro 2016 championship in June).
Grosvenor venues’ l-f-l revenues increased by 2% despite a tough comparator and some general softness across the London market. We note an article in yesterday’s Evening Standard newspaper suggesting that Rank (along with Aspers) reduces its tax bill by locating electronic roulette wheels in provincial casinos (which, being smaller, pay a lower rate of tax than London casinos). While this is true the effect is small (we believe Grosvenor saved less than £0.25m of tax in FY15 out of total taxes and duties of c £100m) and the additional electronic wheels offer customers more choice.
Mecca Bingo
A good performance in the venues was partly overshadowed by the 5% fall in digital revenues. Initially we believed that minor hiccups over the migration had been resolved (Update note dated 11 March). However, there continued to be issues around Mecca’s content management system, especially at times of high player volumes. These are now being resolved and the last couple of weeks have seen much better platform stability. Any disruption tends to affect player retention, especially given the competitive nature of the UK bingo market. Also, Rank had held back from new product releases and marketing ahead of the migration, but management now expects new content (eg games from Net Ent. and Eyecon) and functionality “to have a positive impact on performance”. Updated trends with the final results on 18 August should provide a better steer.
Mecca venues’ l-f-l revenue increase of 3% continued the recent improving trend with spend-per-head up 3% and admissions remain broadly stable (down less than 1%). Allowing for clubs closed in 2015, total revenue was flat. The first of Rank’s new format bingo venues is due to open in the Midlands this summer (under a new brand name).
Enracha
Enracha’s KPIs are not separately disclosed in the IMS but they are included in the total figures. It continues to perform well, with visits up 11% and constant currency revenues up 7% (reported up 14%) helped by improved spend per head and a stronger economic backdrop. The new Enracha digital site is due to be soft-launched over the summer.
Exhibit 2: Recent results and estimates
Year to June £m |
H115 |
H215 |
FY15 |
H116 |
H216e |
FY16e |
FY17e |
FY18e |
Grosvenor venues |
195.7 |
205.4 |
401.1 |
205.1 |
208.9 |
414.0 |
423.0 |
430.0 |
Grosvenor digital |
9.9 |
12.4 |
22.3 |
13.9 |
16.6 |
30.5 |
43.0 |
53.0 |
Grosvenor total revenue |
205.6 |
217.8 |
423.4 |
219.0 |
225.5 |
444.5 |
466.0 |
483.0 |
Mecca venues |
111.8 |
112.6 |
224.4 |
109.8 |
111.2 |
221.0 |
219.0 |
217.0 |
Mecca digital |
31.5 |
33.7 |
65.2 |
33.2 |
32.3 |
65.5 |
73.0 |
79.0 |
Mecca total revenue |
143.3 |
146.3 |
289.6 |
143.0 |
143.5 |
286.5 |
292.0 |
296.0 |
Enracha revenue |
12.8 |
12.5 |
25.3 |
12.2 |
12.8 |
25.0 |
27.0 |
29.0 |
Group revenue* |
361.7 |
376.6 |
738.3 |
374.2 |
381.8 |
756.0 |
785.0 |
808.0 |
Grosvenor EBITDA |
43.8 |
47.9 |
91.7 |
46.4 |
52.6 |
99.0 |
105.0 |
111.2 |
Mecca EBITDA |
29.9 |
27.3 |
57.2 |
27.5 |
27.2 |
54.7 |
55.5 |
57.5 |
Enracha EBITDA |
1.7 |
2.4 |
4.1 |
2.2 |
2.1 |
4.3 |
4.4 |
4.6 |
Central costs |
(13.3) |
(13.4) |
(26.7) |
(13.4) |
(14.6) |
(28.0) |
(28.9) |
(29.5) |
Group EBITDA |
62.1 |
64.2 |
126.3 |
62.7 |
67.3 |
130.0 |
136.0 |
143.8 |
EBITDA margin % |
17.2% |
17.0% |
17.1% |
16.8% |
17.6% |
17.2% |
17.3% |
17.8% |
Depreciation/amortisation |
(21.3) |
(21.0) |
(42.3) |
(22.3) |
(22.7) |
(45.0) |
(46.5) |
(47.8) |
Group operating profit (norm) |
40.8 |
43.2 |
84.0 |
40.4 |
44.6 |
85.0 |
89.5 |
96.0 |
Net finance costs (norm) |
(5.0) |
(4.9) |
(9.9) |
(3.0) |
(3.0) |
(6.0) |
(5.5) |
(5.5) |
PBT (norm) |
35.8 |
38.3 |
74.1 |
37.4 |
41.6 |
79.0 |
84.0 |
90.5 |
Source: Rank Group, Edison Investment Research. Note: Revenue is before customer incentives.
Valuation
Rank’s share price rose by 77% in 2015 (ending the year at 285p) so some profit-taking in 2016 is perhaps unsurprising. While we would have hoped to see slightly stronger Mecca digital metrics in this IMS it is still early days in the platform migration and Grosvenor’s progress is encouraging. The 17% YTD fall in the share price looks overdone. As shown in Exhibit 3, Rank’s rating now stands at a material discount to the European peer group despite its regulated status, steady growth, cash generation and progressive dividend policy (and even allowing some discount for the 56% majority shareholding). Our sum of the parts is 252p to 302p and our DCF produces a value of 300p (WACC of 9%, terminal growth of 2%).
Exhibit 3: Peer group comparison
Company |
Price |
Mkt Cap |
EVEBITDA (x) |
P/E (x) |
||||
|
(p) |
(£m) |
2015 |
2016e |
2017e |
2015 |
2016e |
2017e |
Rank Group (RNK)* |
237 |
928 |
7.7 |
7.3 |
6.7 |
15.8 |
14.7 |
13.7 |
888 Holdings (888) |
215 |
770 |
12.6 |
12.3 |
10.3 |
19.5 |
19.5 |
17.3 |
GVC Holdings (GVC) |
542 |
1,580 |
7.0 |
11.2 |
8.4 |
11.0 |
27.3 |
13.8 |
Ladbrokes (LADB) |
117 |
1,186 |
9.0 |
8.0 |
7.1 |
25.5 |
18.5 |
14.7 |
Paddy Power Betfair (PPB) |
8975 |
7,512 |
25.4 |
21.0 |
17.3 |
37.1 |
29.7 |
20.7 |
Playtech (PTEC) |
807 |
2,603 |
12.0 |
9.9 |
8.7 |
16.0 |
14.6 |
13.1 |
William Hill (WMH) |
306 |
2,667 |
8.7 |
8.9 |
7.9 |
12.4 |
13.0 |
11.4 |
European peer group average |
11.8 |
11.2 |
9.5 |
19.6 |
19.6 |
15.0 |
||
Average ex PPB |
9.5 |
9.6 |
8.2 |
16.7 |
17.9 |
14.0 |
||
Boyd Gaming (BYD) |
$19.48 |
1,503 |
8.6 |
8.3 |
7.7 |
24.7 |
17.2 |
13.9 |
Century Casino (CNTY) |
$6.36 |
122 |
7.8 |
7.0 |
6.3 |
16.7 |
13.3 |
11.2 |
Source: Bloomberg, Thomson Reuters, Edison Investment Research. Note: *Calendarised. Share prices as at 11 May 2016.
Exhibit 4: Financial summary
£'m |
2014 |
2015 |
2016e |
2017e |
2018e |
||
June |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
707.7 |
738.3 |
756.0 |
785.0 |
808.0 |
Cost of Sales |
(409.2) |
(414.2) |
(425.5) |
(446.9) |
(461.0) |
||
Gross Profit |
298.5 |
324.1 |
330.5 |
338.1 |
347.0 |
||
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 |
43.1 |
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: Rank Group, Edison Investment Research. Note: Unwinding of discount in disposal provisions, other financial gains and losses including FX.
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