Rank Group bets on digital

UK gamblers and investors have found it difficult to profitably navigate the UK gaming sector as it moves online. Rank Group is the UK market leader in ‘bricks and mortar’ casinos and bingo clubs. A new management team and increasing online presence suggest that the company offers investors favourable odds.

Rank Group’s three divisions are Mecca Bingo, Grosvenor Casinos and the Spanish bingo operator Enracha. The UK brands are a familiar sight in the UK and offer a different gaming experience to high street bookmakers like William Hill.

The venues offer a social night out and appeal to a broader demographic than the male dominated bookies. It is an experience that cannot be replicated online and, in the case of bingo, is able to attract an older demographic and women.

Source: Rank Group investor presentation

Rank Group appointed Ian Burke as CEO in May 2014 with Mr Burke previously having been the CEO of William Hill Online. Before that he was the CEO of Leisure & Gaming plc, which owned online and retail gaming businesses.

This backdrop should enable Rank to grow its online gaming business and shore up its ‘bricks and mortar operations’. However, with a range of competing leisure opportunities it is critical that Rank’s brands remain appealing.

Rank Group’s objective is to be “the UK’s leading multi-channel gaming operator” through a 5-pronged strategy. This includes building a digital capability and to invest in technology to improve the customer experience and drive efficiency.

Rank Group profile: Casinos and Bingo venues

Grosvenor is the largest Casino operator in the UK with 58 of 154 Casino venues and the second largest player being Genting at 41 venues. Mecca is the second largest bingo operator with 90 venues versus Gala Bingo with 130 venues.

In the year to June 2015 and Grosvenor Casinos generated 57% of group revenue and 59% of operating profits before central costs. Mecca generated 39% of revenue and 38% of operating profit before central costs.

The Spanish business Enracha is only a small part of the group at 3.4% of last year’s revenue. The bulk of Rank’s revenue, at around 95%, therefore comes from the UK with only a small proportion generated in the Eurozone.

Rank Group year to June

Source: Rank Group investor presentation

Bricks and mortar performance

In the year to June 2015 Grosvenor Casinos saw customer visits increase by 1% to 8.223m and spending per head saw a more robust increase of 5% to £48.72. Revenue from the venues therefore increased by 6% on a year ago to £401m.

Mecca Bingo venues saw customer visits decline by 4.5% to 12.03m and spending per head rose by 2.5% to £18.65. As such revenue from Mecca venues saw a 2.1% decline to £224.4m.

Currently around 88% of the group’s revenue comes from its bricks and mortar casino and bingo halls. Only 5% of customers visiting the physical sites also use the digital platforms while for William Hill and Ladbrokes the figures is 11-12%.

Digital revenue growth

Looking at the digital side of the business and revenues rose by 21% last year and operating profit rose by 14%. Mobile is the key driver of digital revenue with 65% of customers playing on mobile devices versus 49% last year.

Source: Rank Group investor presentation      

Online revenue for Grosvenor Casinos increased by 65% in the year to June 2015 to £22.3m. Visitors to the Grosvenor Casino digital platform rose by more than half to 667,000 and spend per person rose by 9% to £33.43.

Operating profit came in at £3.1m, versus a loss of £0.9m the year before, but this compares to £63.4m operating profit from Grosvenor’s physical sites. Rank highlights the crossover from the retail to the digital side of the business.

For Mecca Bingo the online side of the business saw revenue increase by 10.7% to £65.2m. Digital visits increased by 8% to 5.1m while spend per head rose by 2.4% to £12.51.

Operating profits fell by 11% to £14.1m with the group citing the investment in profit and marketing made during the year a headwind. While Mecca Bingo earns greater online profits than Grosvenor Casino it is also growing at a slower pace.

Financial turnaround

The financial position of Rank Group has seen a significant improvement with net debt falling by 61% to £52.9m. Cash inflow from operations increased by 44% to £154.5m while adjusted earnings per share rose by 18% to 18.6p.

This puts Rank Group in a strong position to invest in its digital opportunity and allowed the group to increase the final dividend by 27% to 4p. A new Grosvenor Casino also opened in Southend in September 2014.

Rank Group financial results year to June

Source: Rank Group investor presentation

Summary & Valuation

Competing for the leisure pound is no easy task with taste changes and the competition developing new products. Results from Rank Group show that its Mecca Bingo brand is getting fewer customers through the doors.

However, the main profit generator, Grosvenor Casinos, is seeing an increasing footfall. The digital side of the business is also seeing revenue and profits momentum for both brands.

To improve the architecture of the digital offering the group is migrating to Bede Gaming’s platform in the first quarter of 2016. This should mean greater functionality and faster product upgrades.

The balance sheet has been transformed and as such Rank Group is in a strong position to invest in its product offering. The company also has the scope for acquisitions and they are likely to be in the digital space.

Looking at the valuation and the rally in the share price has pushed the forecast P/E ratio to 17.3X for the year to June 2016. This is expected to fall to 16X in the following year as the digital side delivers further profits growth.

This report was produced by Fat Prophets Senior Research Analyst, Andrew Latto CFA