Interactive Investor

Ambitious Rank worth a bet?

23rd August 2016 12:59

Lee Wild from interactive investor

It's been an eventful month for Rank Group. A failed bid for William Hill laid bare the ambition of Henry Birch and his team to become a major force in the gambling industry, but final results have received a mixed reception and the Mecca bingo hall operator has lots to do to make it happen.

A joint deal with online casino operator 888 for high street bookie William Hill would certainly have been transformational, and further industry consolidation cannot be ruled out. But Rank is also busy on its own strategy. And there's plenty to go for in terms of its digital business. Last year, it only generated 13% of group revenue compared with the web's 39% share of the UK gambling market.

Progress has been made, but while Mecca digital is onto a new platform, it is widely thought to be about six months behind target in terms of functionality. Now, Birch says this year he'll launch a new digital Mecca VIP site, beef up the internet sports betting business, upgrade both the UK casino and poker sites, and improve the enracha.es gaming website in Spain.

Rank's digital plans are sound, but revenue from online and mobile devices has grown just 11% to £96.7 million over the past 12 months and, if it can't do better than that, it will have to go shopping to build its online presence.

And growing the web operation is crucial given Rank, like others in the industry, must absorb new gambling taxes and the minimum wage. Remote Gaming Duty (RGD) of 15% cost the company £4.8 million in the year to 30 June, and the National Living Wage, introduced in some parts of the business in January, £1.4 million. It's why group underlying operating profit fell 2% to £82.4 million. Before RGD it was up 4%.

Profit before tax adjusted for one-off items rose 4% to £77.4 million on revenue up 2% to £753 million, although the City had wanted more. Net debt shrank by a fifth to £41.2 million and should keep falling, while a big increase in the final dividend gives a full-year payout of 6.5p, up 16%.

Of course, there are still concerns. While management plays down the threat of Brexit, there's already plenty of evidence to suggest household spending will slow in the third-quarter. Rank might also have another crack at consolidating the industry, and it must make further progress in digital. But the recent sell-off may be an opportunity for investors.

"While the digital turnaround may be taking slightly longer than expected, the relatively low valuation means downside is limited for those that are willing to be patient," writes broker Goodbody.

And the charts are certainly supportive. While the 25% plunge from 300p at the turn of the year looks ugly, the uptrend established late 2013 remains intact. This means there's a major line of support, currently at 206p, with multiple touch points providing plenty of conviction.

A 5% increase in adjusted earnings per share to 15.4p is tipped by Edison to rise again this year to 16.2p. That puts Rank on a forward price/earnings ratio of 14, a big discount to rivals. There's also a prospective dividend yield of 3.3% covered 2.2 times by earnings.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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