Rank Ranks Among the Best

TAGs: Editorial, henry birch, Paddy Power, Rafi Farber, Rank Group

Rank Ranks Among the BestIn terms of fiscal responsibility, growth, and stability, The Rank Group is on par with Paddy Power and 888. These are among the healthiest gaming companies in the industry with clear plans forward and little systemic risk to their businesses. While no European country is rock solid stable, the United Kingdom is among the more financially stable entities in the old continent, and Rank has 95% of its business in the UK market. Sitting outside of the Eurozone is going to turn into a huge advantage when eventually the Eurozone breaks up due to too much debt. Admittedly nobody knows when this will happen, but we do know that deleveraging is certainly not taking place there, despite the austerity we have been hearing about all the time.

Rank’s balance sheet is as healthy as it can be. As of last annual report at midyear, net debt was only £52.9m compared with net debt of £137.0m in 2014. Rank used its debt wisely in acquiring Gala casinos in 2012, and has paid much of it off already. The rest can be paid off quickly so the company does not have to worry about trouble in the debt markets if any shenanigans occur this coming year.

Since absorbing Gala’s casinos, Rank controls 56 casinos, 96 bingo clubs, and a fast-growing digital gaming segment. The 2 casinos it controls in Belgium and the 9 bingo clubs operating in Spain are quaint little ventures, but nothing serious. Spain has looked increasingly unstable in the last two years, especially with secessionist movements mainly in Catalonia and some other provinces gaining steam. Even so, only 3% of Rank’s total business is Spanish based, and even less in Belgium.

The fastest growth for Rank is coming from digital, a very good sign. It does lead to competing against oneself, but there’s really little to do to avoid that. If you’re growing your digital market, that is going to cannibalize on some customers who would have otherwise gone physically to a casino. The hope is that you gain more digital customers on net than you took away from land-based, and that is indeed what is happening.

While casino revenue overall, accounting both digital and brick and mortar is up 8% since last year, casino volume was flat through June. More recently, a report in October for the previous 15 weeks showed that total casino visitation dropped 5% year over year, and 1% on a like-for-like basis. Rather than seeing this as a sign of stagnancy, it’s probably just an unfortunate byproduct of growing and scaling up the digital segment. CEO Henry Birch admits as much in his report to shareholders. Speaking of the joint priorities of growing the digital and traditional Grosvenor business, Birch noted that “Whilst these two priorities can sometimes work against each other – new platforms often result in periods of disruption for a business – we are confident that we will deliver.”

So far it looks like he is delivering. Digital revenue is up 56% as of the October report after being up 21% last year. Digital revenue as a percentage of total revenue is still relatively small though at 12% through June. That number is now probably between 15% and 20%, so we should continue to see strong growth numbers in digital until a plateau is reached. A new digital platform is being launched next quarter, which could raise the if-it-ain’t-broke-don’t-fix-it issue, but being far away from the details and seeing the current rate of digital growth, it seems like the company knows what it’s doing. The new platform aims to integrate Rank’s digital and land-based businesses to allow for a single view for the customer. The ultimate aim seems to be to attract digital customers to the Grosvenor land-based casinos and vice versa by putting a digital umbrella over the whole operation.

True, the Mecca bingo side of the business isn’t exactly flourishing, but a recent tax break on bingo has allowed Rank to more aggressively invest in that side of the business going forward. We’ll see if that works. Right now it doesn’t look all that great with Mecca as 6 venues were closed last year with more closures planned for 2016. Still, operating profit increased 16% last year from £37M to £43M while revenue remained flat. Tax cuts do help these things. 2016 will also see a new bingo club format in an attempt to grow the top line as well.

Another plus for shareholders is that dividends have been growing consistently from 2.66 pence in 2011 to 5.60 pence now. This still gives Rank a relatively low yield below 2%, but growth prospects and healthy finances balance that out.

The biggest headwind facing Rank is that annoying 15% point of consumption tax. That along with other factors is what’s depressing Rank’s bottom line. By midyear 2012, Rank had earned £112M off of £556M in revenues. By midyear 2015, the bottom line came in at £75M off of £701M in revenues. Profit margins have essentially been cut in half then, which is almost the only substantively worrying sign long term. But even if margins fail to come back up to the 20% range, growth is robust enough to bring the bottom line back up to 2012 levels soon. The best way for Rank to bring those margins back up would be to grow Mecca bingo, given the recent bingo tax cuts. The other reason growth in bingo would be a particularly good sign is that the Mecca and Grosvenor customer bases are more separated than the digital vs. land based Grosvenor gamblers. There is less self-competition involved, less cannibalizing of your own customer bases.

This year then, there will be two main things to watch for. First is the continuing growth of digital and how its integration into the land-based business on the new platform will work. It should increase overall customer value. Second is top-line growth in bingo. In order to get margins back towards the 20% mark, Rank will need to focus on the part of its revenue stream that isn’t under attack by a 15% POC tax.

Overall, Rank looks like a good long term hold at this point. Along with Paddy Power and 888, a mix of those three companies can make a strong defensive portfolio with some good potential for long term growth as well.


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