Rank looks online

There was a certain amount of relief when casino operator Rank (RNK) finally received the regulatory all-clear for its takeover of Gala Casinos, with the condition that it sells premises in some locations to avoid competition worries. With management currently focused on developing the business, the question now is how the company will improve its internet offering at a time when land-based casinos face huge competition from online gaming.

Predictably, the weather played havoc with the company's third-quarter figures. For example, like-for-like revenues were down by 2 per cent, with a consistent trend of lower spend per head in its provincial casinos. The business is now looking increasingly focused on its core casino venues and digital operations after selling the loss-making Blue Square fixed-odds betting business to Betfair for £5m.

Online is currently the only area experiencing serious sales growth - Grosvenor casino revenues surged by 64 per cent in the financial year to date - and analysts are expecting a more comprehensive digital strategy to emerge from Rank after the company was criticised for lagging the sector. That's probably why the online casino is now getting significant investment through to the end of 2015.

Another area that will help sentiment is the future of Guoco's majority stake. Broker Investec Securities points out that Guoco's 74.5 per cent stake in Rank, which took the company close to de-listing in 2011, is significantly higher than its stakes in other listed businesses, which opens up the possibility of an equity sale if Rank's share price stays above Guoco's buy-in price.

Peel Hunt says...

Buy. The upside from Gala is substantial and it is now time for management to realise the potential, which we expect it to do. Even after the Gala deal net debt should be substantially below 1.5 times forecast cash profits, while capital expenditure will be fully funded by internal cash flow. A prospective enterprise value to cash profits ratio of six times for the financial year to June 2014 and a forward PE ratio of 11.5 for a fully regulated gaming business represents excellent value.

Investec says...

Buy. The upside from Gala in 2013-14 is offset by continued tough trading in bingo (we assume marginal profit declines in land-based bingo over the medium term) and investment in the group's online casino and bingo brands. We expect Rank's Spanish operations to broadly break-even, while Gala is projected to contribute operating profits of £17m in the 12 months to June 2014, rising to £18.4m the year after. Expect EPS of 12.1p this year, rising to 13.6p in 2013-14. Our price target is 200p.