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Research: Consumer
Rank Group
Written by
Rank Group |
Solid results ahead of platform migration |
Interim results |
Travel & leisure |
29 January 2016 |
Share price performance
Business description
Next events
Analysts
Rank Group is a research client of Edison Investment Research Limited |
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Interim results were broadly as expected, with 11% underlying operating profit growth offset by higher UK remote gaming duty. Positive highlights included 2% l-f-l growth in Mecca retail, a good result in provincial casinos, strong cash flows and a 13% dividend increase. Small tweaks to our full year numbers produce a minor upgrade to EPS, but the main focus for H216 is on a successful platform migration to drive the group’s digital and omni-channel growth. The FY16e EV/EBITDA of 8.8x remains undemanding.
Year end |
Revenue* (£m) |
EBITDA** |
PBT** |
EPS** |
DPS |
P/E |
Yield |
06/14 |
708 |
116.0 |
62.5 |
12.4 |
4.5 |
22.4 |
1.6 |
06/15 |
738 |
126.3 |
74.1 |
14.6 |
5.6 |
19.0 |
2.0 |
06/16e |
756 |
130.0 |
79.0 |
15.7 |
6.4 |
17.7 |
2.3 |
06/17e |
785 |
136.0 |
84.0 |
16.7 |
7.4 |
16.6 |
2.7 |
06/18e |
807 |
143.8 |
90.5 |
18.0 |
8.4 |
15.4 |
3.0 |
Note: *Revenue is before customer incentives. **EBITDA, PBT and EPS are normalised, excluding amortisation of acquired intangibles, one-off and exceptional items.
H116 normalised PBT up 4%
After a strong Q1 (l-f-l revenue up 8%), Q2 was softer both in London (in common with much of the UK hospitality industry) and in digital, leaving H116 l-f-l revenue up 5%. Normalised operating profit was flat at £40.4m (H115: £40.8m), but this was after an incremental £4.8m impact from the UK remote gaming duty (RGD) introduced in December 2014, and the underlying growth was 11%. Strong cash flow has led us to reduce both our year-end debt forecast (from £65m to £42m) and interest charges and, as a result, we have slightly increased our FY16e normalised PBT estimate by £1m to £79.0m and EPS from 15.5p to 15.7p.
Platform migration on schedule for end March
Rank’s key growth opportunity is to increase its digital revenues (up 14% in H116). In casino, less than 3% of its c 1.7 million customers play at grosvenorcasinos.com yet c 25% of them are estimated to play online. Central to the improved cross-sell goal is migration to the new IT platform hosted by Bede, which should offer better bonusing and player tracking and thereafter facilitate the move to a fully omni-channel product offering. Rank has today announced new suppliers for sports (Kambi) and digital poker (Microgaming). Migrations are not without risk, but Rank has been working closely with Bede and we expect the benefits to begin to show through in H216 and more particularly in FY17 and beyond.
Valuation: FY16e EV/EBITDA of only 8.8x
Rank has market-leading, cash-generative, land-based gaming businesses, considerable potential in digital and plenty of financial flexibility to consider augmenting organic growth with acquisitions if the right opportunity arises. Demonstration of a successful platform migration should be a positive catalyst. The FY16e EV/EBITDA of 8.8x remains below the peer group average of 9.7x.
Interim results and full year estimates
Exhibit 1: Changes to forecasts
EPS |
PBT* |
EBIT* |
|||||||
Old |
New |
% chg. |
Old |
New |
% chg. |
Old |
New |
% chg. |
|
FY16e |
15.5 |
15.7 |
+1.3 |
78.0 |
79.0 |
+1.3 |
86.0 |
85.0 |
-1.2 |
FY17e |
16.6 |
16.7 |
+0.6 |
83.5 |
84.0 |
+0.6 |
91.0 |
89.5 |
-1.6 |
FY18e |
18.0 |
18.0 |
- |
90.5 |
90.5 |
- |
98.0 |
96.0 |
-2.0 |
Source: Edison Investment Research. Note: *Normalised.
We discussed Rank’s businesses in detail in our Initiation report dated 8 September 2015. A small reduction to our normalised operating profit (EBIT) forecasts mainly arises in Mecca despite positive l-f-l retail performance, to reflect ongoing club closures and more prudent digital targets. Our forecast also allows for additional marketing spend in both Grosvenor and Mecca post the platform migration. Central costs are running below our previous expectations. Offsetting our EBIT change is a cut to forecast interest (from £8.0m to £6.0m in FY16e) to give a small upgrade to our normalised PBT and EPS estimates (Exhibit 1).
Exhibit 2: Half yearly results and estimates
Year to June £m |
H115 |
H215 |
FY15 |
H116 |
H216e |
FY16e |
FY17e |
FY18e |
Grosvenor |
205.6 |
217.8 |
423.4 |
219.0 |
225.5 |
444.5 |
467.0 |
484.1 |
Mecca |
143.3 |
146.3 |
289.6 |
143.0 |
144.5 |
287.5 |
292.0 |
296.0 |
Enracha |
12.8 |
12.5 |
25.3 |
12.2 |
11.8 |
24.0 |
26.0 |
26.9 |
Group revenue |
361.7 |
376.6 |
738.3 |
374.2 |
381.8 |
756.0 |
785.0 |
807.0 |
Customer incentives |
(18.4) |
(19.2) |
(37.6) |
(21.5) |
(17.1) |
(38.6) |
(42.3) |
(45.7) |
Statutory revenue |
343.3 |
357.4 |
700.7 |
352.7 |
364.7 |
717.4 |
742.7 |
761.3 |
EBITDA |
62.1 |
64.2 |
126.3 |
62.7 |
67.3 |
130.0 |
136.0 |
143.8 |
Depreciation/amortisation |
(21.3) |
(21.0) |
(42.3) |
(22.3) |
(22.7) |
(45.0) |
(46.5) |
(47.8) |
Grosvenor operating profit |
31.0 |
35.5 |
66.5 |
33.3 |
39.2 |
72.5 |
78.0 |
83.2 |
Mecca operating profit |
22.9 |
20.1 |
43.0 |
19.9 |
19.6 |
39.5 |
39.5 |
41.5 |
Enracha operating profit |
0.9 |
1.7 |
2.6 |
1.4 |
1.4 |
2.8 |
2.9 |
3.1 |
Central costs |
(14.0) |
(14.1) |
(28.1) |
(14.2) |
(15.6) |
(29.8) |
(30.9) |
(31.8) |
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 |
EPS (norm) continuing ops (p) |
7.1 |
7.6 |
14.6 |
7.4 |
8.2 |
15.7 |
16.7 |
18.0 |
DPS (p) |
1.6 |
4.0 |
5.6 |
1.8 |
4.6 |
6.4 |
7.4 |
8.4 |
Dividend cover (x) |
4.4 |
(1.8) |
2.6 |
4.1 |
(1.7) |
2.4 |
2.3 |
2.1 |
Source: Rank Group, Edison Investment Research. Note: Normalised PBT is before exceptional items, the unwinding of discount in disposal provisions and other financial gains and losses (a net total of £5.7m profit in H116).
Grosvenor Casinos
H116 revenue increased by 7%, with venues up by 5% and digital up 40%. The provinces had a good half, with operating profit up by 14% helped by an 11% increase in high-margin machine revenues. By contrast, London profit was flat (on a 5% revenue increase) due to high VAT and promotional costs. London will also face a tough H2 comparative for VIP spend. Digital customers more than doubled from 54k to 126k, reflecting more effective marketing and a cross-sell ratio of 2.7% (H115: 1.7%). This drove a 26% increase in digital operating profit to £2.4m despite a £1.5m increase in RGD. Without the extra tax, digital profit would have doubled reflecting economies of scale as the business – still only 6% of divisional revenue – scales up.
Mecca Bingo
A 2% increase in l-f-l venues revenue reversed an historic trend, with spend per head up 2% and even admissions showing a very small l-f-l growth in Q2. The BBC recently reported (2 January) that bingo is beginning to attract more younger players, helped by the popularity of devices such as the Mecca Max and renewed industry investment post the 2014 duty cut, and Mintel forecast that spending in UK bingo clubs will rise from £690m in 2014 to £728m by 2019 (a CAGR of 1%). However, the introduction of the National Living Wage from 1 April will bring additional cost pressures and Rank closed three clubs during the period (generating an exceptional profit of £6m through the disposal of a freehold property). It will, however, open a new format club (under a new brand name) during H216 as part of its commitment to the government linked to the 2014 duty reduction. Digital remains a competitive arena, with Rank’s Q116 digital revenue growth of 10% falling back to a slightly disappointing 5% for H116 (to £33.2m or 23% of the divisional total). Digital operating profit fell by 33% to £5.6m after £3.3m of extra RGD, but without the extra duty it would have increased by 6%.
Enracha
Enracha’s good underlying performance was masked by adverse currency translation; constant currency revenue increased by 4% helped by an improving Spanish economy, with an 8% increase in customer visits offset by slightly lower spend per head due to changes in the mix. Tight cost control lifted operating profit by 56% (c 73% at constant currency).
Stronger than expected underlying cash flow
Rank’s net debt was £52.0m at 31 December 2015 (June 2015: £52.9m, December 2014: £94.9m). This was despite paying £21.4m in settlement of the tax avoidance scheme (we had assumed £22-24m), but after raising £7.0m from disposals and benefiting from a £4.5m corporation tax refund. With the disposals, tax refund and a slight reduction in our forecast working capital, we have reduced our overall forecast of June 2016 net debt from £65.0m to £42.0m. Moreover, the September 2015 debt refinancing has lowered the group’s average interest rates and improved its debt profile: all but £17.9m of the group’s £122.2m of loans and borrowings at 31 December was non-current. In the absence of any acquisitions, we now expect Rank to have net cash of £23.0m at end FY18 (previous estimate £1.0m).
Valuation
Exhibit 3 updates our peer group comparison for Rank. The shares have performed very well, up 68% in a year (and 7% since our Initiation report, despite the stock market turbulence). Nevertheless, its (annualised) 2016e EV/EBITDA still stands at an 11% discount to the average (from which we exclude Paddy Power given its high rating ahead of the planned merger with Betfair). Rank’s P/E is at a small premium (6%), but we consider there is still scope for multiple expansion given Rank’s leading market positions, omni-channel growth opportunity and fully regulated status. Demonstration of a successful platform migration should be a positive catalyst.
Exhibit 3: Peer group comparison (calendar years)
Company |
Price |
Mkt Cap |
EBITDA (x) |
P/E (x) |
||||
|
(p) |
(£m) |
2015e |
2016e |
2017e |
2015e |
2016e |
2017e |
Rank Group (RNK)* |
278 |
1,086 |
8.9 |
8.6 |
8.1 |
18.5 |
17.2 |
16.0 |
888 Holdings (888) |
177 |
633 |
10.6 |
9.9 |
9.0 |
18.0 |
16.8 |
14.8 |
Ladbrokes (LADB) |
124 |
1,260 |
10.9 |
9.4 |
8.6 |
27.1 |
18.8 |
15.0 |
Paddy Power (PAP) |
€ 134.8 |
4,498 |
26.2 |
22.4 |
19.9 |
41.7 |
33.5 |
33.5 |
Playtech (PTEC) |
748 |
2,413 |
12.4 |
10.4 |
9.5 |
15.4 |
13.9 |
12.7 |
William Hill (WMH) |
382 |
3,377 |
10.7 |
10.0 |
9.5 |
16.4 |
15.1 |
13.7 |
Average ex PAP |
10.7 |
9.7 |
8.9 |
19.1 |
16.3 |
14.5 |
||
Source: Thomson, Edison Investment Research. Note: *Annualised to December. Prices as at 28 January 2016.
There have been a number of deals in the land-based gaming space in recent months. In October 2015 Caledonia Investments acquired Gala Bingo for £241m (a 2015 EV/EBITDA of 4.6x). The deal did not include galabingo.com, which suggests to us that its development of a fully omni-channel product offering will be less straightforward than for Mecca. In December Hong Kong-listed Landing International acquired the high-end London Les Ambassadeurs casino for £137m, an historic EV/EBITDA of 7.9x, marking its first foray outside Asia.
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 |
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: Rank Group, Edison Investment Research. Note: *Unwinding of discount in disposal provisions, other financial gains and losses including FX.
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