When it comes to gambling stocks there are two things that tend to excite investors: online growth and regulated income - as opposed to income from unregulated territories where law changes represent an ever-present danger. Bingo and casino company Rank (RNK) boast plenty of both. The only issue is that the digital business still represents a tiny proportion of the total. But that's changing and as it does the shares should benefit.
- Huge potential for digital revenues
- Taxes on bingo falling
- Cash-generative
- Potentially debt-free by 2018
- Economic weakness likely to hit customers
- Liquidity
The company, which owns the Grosvenor Casinos and Mecca bingo brands, generates 88 per cent of revenue from its venues. Only 5 per cent of its 2.7m members currently use its online services. Recently installed chief executive Henry Birch wants to change this and last year's 21 per cent digital growth was encouraging. Rank is attempting to drive more players online by investing in its mobile product, improving its digital poker offering and launching new digital brands.
Research house Edison expects compound average digital revenue growth of 17.5 per cent out to 2018, which should increase online operating profits by 60 per cent to £32m, 18 per cent of the forecast total. Pivotal in driving this growth will be the launch of a digital platform in the third quarter. The platform is being developed by Bede Gaming, which was chosen partly because of the potential for Rank to take ownership of the technology in the future.
Rank's bricks-and-mortar business, while somewhat less exciting from a growth perspective, is also performing well. The bingo business has benefited from the fact that the current government seems to have a fondness for this particular form of gambling and halved duty on the activity from 20 per cent to 10 per cent in 2014. This is very different to the significant rise in taxes being felt by other gambling companies, who have been hit by the 15 per cent point of consumption tax (Rank's online casino operation has been affected by this too) as well as the machine gaming duty.
The reduction in bingo duty has encouraged investment in the estate, with three new openings planned along with eight "light" refurbishments, while six lossmaking bingo halls were closed last year. The company has also been active with its casinos; it closed two last year, and plans to refurbish three to five this year.
The investment in the estate and online growth is underpinned by strong cash generation, which reduced net debt from £137m to £53m last year. Edison expects debt to rise again this financial year to £65m due to the timing of tax payments and investment, but decline rapidly to zero by the end of 2018. This should leave management with the firepower to boost growth with acquisitions if the right opportunities come along.
One potential issue with the shares is liquidity, given that Hong Leong still owns 56 per cent of the stock, despite reducing his holding in February.
| RANK GROUP (RNK) | ||||
|---|---|---|---|---|
| ORD PRICE: | 280p | MARKET VALUE: | £1.09bn | |
| TOUCH: | 277p-280p | 12M HIGH / LOW: | 286p | 156p |
| FORWARD DIVIDEND YIELD: | 2.5% | FORWARD PE RATIO: | 17 | |
| NET ASSET VALUE: | 75p* | NET DEBT: | 18% | |
| Year to 30 June | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2013 | 625 | 64.6 | 12.3 | 4.1 |
| 2014 | 708 | 62.5 | 12.4 | 4.5 |
| 2015 | 738 | 74.0 | 14.6 | 5.6 |
| 2016* | 756 | 78.0 | 15.6 | 6.2 |
| 2017* | 779 | 82.8 | 16.6 | 6.9 |
| % change | +3 | +6 | +6 | +11 |
Normal market size: 1,500 Matched bargain trading Beta: 0.02 *Includes intangible assets of £396m, or 101p a share **Peel Hunt forecasts, adjusted PTP and EPS figures | ||||
