Rank has its ducks in a row

Think bingo, and you think of halls full of elderly 'bingo-winged' women hoping to hear the caller read out "two fat ladies". Yet, despite its down-at-heel perception, bingo is big business. The 1960s may have been the game's golden age, when the entertainment pioneer, Eric Morley, brought the game back from the US to take advantage of the UK's less strict gambling laws and sparked a nationwide craze. Yet, despite years of falling attendances, the industry is still worth £1.9bn a year and has 3m regular players, including 10 per cent of women in the UK.

Rank, owner of Mecca Bingo, the UK's second-largest network of bingo halls, has expended much money and effort in an attempt to bring the image of bingo up to date. Smoking bans and an unfavourable tax regime haven't made the job particularly easy - bingo players are more than twice as likely to smoke as the general population and, in 2007 alone, Rank closed nine halls in anticipation of the introduction of the ban.

Yet in some respects the smoking ban has helped Rank since smaller operators were hit the hardest, taking capacity out of the market. That said, the UK tax burden remains unfavourable. Bingo players pay a higher rate of tax on gross profits – 20 per cent – than punters elsewhere, who generally pay 15 per cent (although VAT on bingo has been largely abolished).

While Rank remains confident that assurances made by the Conservative party will result in a fairer tax treatment, it isn't leaving its fortunes to the whim of government. The business is on an improving trend. The first half of the year saw the first growth in customers for over a decade, and the rollout of an improved food and drink offering is tempting customers to spend more. After rising marginally in the first half of 2010, customer spend climbed 2 per cent in the third quarter.

The group is also betting that the rollout of its new Full House proposition will accelerate growth. The initiative takes Mecca back to its 1950s roots as a fully-fledged entertainment proposition designed to appeal to a wider range of customers than the core bingo audience. The first four Full House sites have seen encouraging results, with admissions said to be around two thirds higher, and two further conversions are planned in the second half.

Rank has also been able to use the strength of its Mecca brand to tap into the growing market for online bingo, one of the fastest growing areas of online gaming. Revenues in Rank interactive climbed 10 per cent in its latest half-year results and, although heavy marketing investment meant the unit was loss-making in the period, that investment appears to be paying off - Rank Interactive's revenues accelerated into the latest quarter, climbing 26 per cent, with strong bingo and casino volumes offsetting weaker sports betting and poker.

And although more famous for its bingo business, it is Rank's casino operation that has hit the jackpot in recent months, with like-for-like sales in the most recent quarter climbing 9 per cent. Just as in its bingo business, the rollout of new formats could mean a material benefit for profits. The new G Casinos are designed to have a wide appeal and Rank says they attract 70 per cent more customers a week than the average provincial casino. The group plans 20 casinos by the end of 2012, up from 12 at the half-year stage.

That rollout won't be cheap, though, at over £1m a casino. But Rank looks in decent financial health, even if net debt is high in relationn to shareholders' funds. In the first half of 2010, net debt fell by over £50m to £133m thanks to strong cashflows and a £43m refund of VAT. The taxman is contesting the decision that saw Rank get a £59m refund in 2008, but Rank has reached an agreement with a third party that caps its liabilities at £26m as opposed to the £66m being sought by the HMRC.