Dividend Income is part of a Company’s income in the form of cash or stocks, which is distributed on a periodic basis. It has been observed historically that dividend-paying stocks have outperformed non-dividend paying stocks. Moreover, investing in dividend stocks can also safeguard the portfolio against market risks and volatile returns as it offers both regular income and capital appreciation. However, it is imperative to focus on three aspects before investing in a dividend stock - Dividend Yield, Dividend Consistency and Dividend Growth.

Dividend Pay-Out Trends and Sustainability

• 45% of UK Companies had already scrapped dividend pay-outs to shareholders in Q1 FY20.
• The forecast of dividend for the FTSE 100 in 2020 has fallen to GBP 62 billion from GBP 91 billion due to the impact of Covid-19 mayhem. Therefore, FTSE 100 is forecasted to yield a dividend of 3.6% for FY20.
• Moreover, the concentration of dividend-paying firms would remain high in FTSE100 as around 20 firms are expected to generate 74% of the total dividend pay-out of FTSE100 in 2020.

 

(Source: Company accounts, Sharecast, analysts’ consensus dividend forecasts)

It is noteworthy, the number of FTSE 100 Companies that have increased dividend consistently each year has fallen to 14 from 25. While it is understandable that dividend cover will be lower in 2020 as earnings are under pressure with the economic downturn. There is a 35% slump in 2020 profits for the FTSE 100 stocks, which is deepest since 2015. Therefore, the dividend payments can be depressive in FY20.

In light of the above factors, we will review a multi-channel gaming operator, which is not merely offering a lucrative dividend but also has the potential of offering consistent and sustainable growth rate trajectory.

Rank Group PLC (LON: RNK) – Maintained guidance for FY20 after delivering 30% growth in interim dividend

Rank Group PLC is a FTSE 250 listed multi-channel gaming operator, which has been serving in Britain since 1937. It has evolved from origins in motion pictures to a well-established gaming-based entertainment brand. Presently, it operates in Great Britain, Spain, and Belgium; however, around 95% of the revenue is derived from Great Britain. It operates through three brands – Grosvenor Casinos, Mecca, and Enracha. The Grosvenor Casinos provides a range of casino table games, and it also has a digital channel to offer games. Mecca offers a variety of bingo and slot games in the British market. Enracha caters to the Spanish market with a wide range of games, such as electronic roulette, sports betting, slot machine games, bingo, among others. As of FY19, the Company had 52 licensed casinos and 82 licensed bingo venues in Great Britain under Grosvenor Casinos and Mecca brands, respectively.

On 10 September 2020, the Company is expected to announce the preliminary results for FY20.

(Source: Presentation, Company Website)

Track Record of Dividend 

In FY19, the Company had given the full-year dividend of 7.65 pence per share, representing 3% year-on-year growth. Further in H1 FY20, RNK declared a 30% growth in interim dividend to 2.8 pence per share, which was paid on 13 March 2020. The Board of Rank targets a sustainable and progressive dividend, which reflects long-term earnings potential and strong cash flow characteristics of the Company.

The table below depicts the historical track record of consistent dividend policy since 2007.

(Source: Company Website)

Upcoming Ex-dividend date is scheduled at around 11 Feb 2021.

Key Fundamental Statistics

Industry Outlook Dynamics

Gambling is a vital sector of the leisure market in terms of broader economic contribution and employment across the world. In recent year, the Gambling has gone through significant changes through legislative and regulatory reforms, new technologies, digitalisation or internet, and a range of economic factors. As per the publication from Research and Markets, the global gambling market is expected to be valued over US$525 billion by 2023, representing a CAGR of approximately 4% between 2017-2023. The key market drivers are increasing per capita income, rising number of dual-income households, growing interest and high adoption.

Adjacently, the online gaming generated nearly £40 billion of gross gaming revenues in 2018, and it is expected to grow at a CAGR of 7% to 2023. However, market regulations, government interventions and legislations are tightening, which provides a constant threat to the industry. At the same time, there is a shift towards online gaming over the past decade, which has been supported by increasing mobile penetration and product innovations.

(Source: Annual Report, Company Website)

Growth Prospects and Risk Assessment

RNK has been transforming the business consistently and exceeding the expectations of customers and shareholders. Moreover, the acquisition of Stride will scale up the capability in the digital market.

 (Source: Annual Report, Company Website)

It has a robust balance sheet which is supported by strong cash generation. It employs over 8,400 employees to provide the best experience to customers across the portfolio of nearly 144 venues. The relationship with the communities and suppliers is a vital part of their strategy. Furthermore, it has constantly been investing in new technologies to ensure a better customer experience. Presently, with 52 licensed casinos in Great Britain, it is the largest casino operator. It is also the largest bingo operator by venues in Great Britain with 82 bingo venues. By tapping the internet opportunities, it is also the largest bingo brand in Spain. Therefore, it has an ambition of generating £1 billion in revenue by 2023 and become an International Gaming Company.

(Source: Annual Report, Company Website)

However, the growth trajectory can be impacted by various factors. There is a risk to revenue generation with closed venues amid Covid-19 restrictions. Moreover, the operational and financial performance can be impacted by adverse changes to rates of tax, adverse gaming win, loss of licences, adverse regulation, and cyber-security risk. It can also fail to deliver as per the transformation plan, resulting in missed synergies and savings. 

Segment Analysis

It operates through five segments - Grosvenor Venues, Digital, Mecca Venues, Central Costs, and International Venues. The acquisition of Stride included within the Digital segment.

 (Source: Presentation, Company Website)

Key Regulatory Updates

10 August 2020: Revised the date of annual results 19 August 2020 to 10 September 2020, while the Annual General Meeting will now be conducted on 11 November 2020.

10 July 2020: Appointed Karen Whitworth as chair of the audit committee and non-executive directors.

3 July 2020: The Company announced the reopening of Mecca bingo clubs from 4 July 2020. Initially, it planned to reopen 35 venues in England with further 30 venues in July or August.

Key Shareholders

Market Update

On 4 July 2020, it had reopened the Mecca bingo clubs. Initially, it has opened 35 venues in England. Other 30 venues are expected to open at the end of August 2020, which are located at Scotland and Wales. While the remaining 12 venues will remain closed until October 2020. Revenues have been at around 60% of pre-Covid-19 levels.

In Digital business, the Company was well-positioned, with an increase in Q4 revenue of approximately 17% on a proforma basis.  Rank expects that the underlying operating profit for the financial year 2020 will be in the range of £48-£58 million after IFRS16 (£40-£50 million pre-IFRS16), driven by the venues reopening costs being expensed. Further, it showed monthly net cash outflow in line with previous guidance, with cash and available facilities of approximately £140 million at 1 July 2020. With the reopening of Mecca, the Company anticipates the monthly cash outflow to be reduced to £7 million per month from circa £10 million per month.

Trading Update (Q3 FY20) - Digital games revenue continue to grow

(Source: Company Website)

• In Q3 FY20, the like for like net gaming revenue for the digital platform was up by 21% year on year; however, Grosvenor venues, mecca venues and international venues revenue were down by 5%, 17% and 12%, respectively. The digital revenues from all brands performed well.
• The Company is benefitted by about £1 million, following the government’s announcement of business rates holiday for the 2020-21 tax year.
• RNK estimated the normal monthly cash outflow to be reduced from £25 million to £17 million post-cost-cutting measures.
• At 31 March 2020, the Group had a cash balance of £166 million after excluding customer balances, and an undrawn credit facility of £85 million.
• The Company reached an agreement with HMRC to defer tax and duty of £40 million from April 2020 until 30 June 2020. Rank Group received repayment of £25.2 million from HMRC for VAT paid on the slot machine revenue between 2002 and 2005. The Upper Tribunal decision was in favour of the Company.

Financial and Operational Highlights (H1 FY2020) - Strong cash flow generation and dividend up 30%

(Source: Company Website)

• The Company witnessed a strong LFL NGR growth in Digital, with an increase in Grosvenor of 21% and Mecca of 13%.
• In the first half of 2020, it has shown strong trading performance across the London venues and positive customer response.
• It has performed strongly in H1 FY20, with a 70% increase in LFL underlying operating profit and Group operating profit to grow by 117% (on a statutory basis).
• Moreover, the Company witnessed a growth across all product areas, as customers reacted positively to the recent investments into product, technology and customer facilities.

Financial Ratios (H1 FY2020 period ended 31 December 2019)

Reported profitability metrics for the first half of 2020 were higher against the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. Rank Group Plc has delivered a decent return for the shareholders’ as return on equity of 9.9% was higher as compared to the industry median of 2.5%.

On the liquidity front, Rank Group Plc’s current ratio was lower than the industry median of 0.69, but the Company has sufficient liquidity to meet short-term obligations and shows a robust liquidity profile to tackle the unprecedented crisis created by COVID-19. On leverage front, the debt-equity ratio was 1.02x, which was roughly in line as compared to the industry median of 1.01x.

Share Price Performance Analysis

Daily Chart as on 28 August 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 28 August 2020, at the time of writing (before the market close, at 12:45 PM GMT+1), Rank Group Plc shares were trading at GBX 136.65, down by 3.35% against the previous day closing price. Stock 52-week High was GBX 328.79 and Low of GBX 78.20, respectively.

Bullish Technical Indicator

14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology

EV/Sales Approach (NTM)

To compare Rank Group Plc with peers, EV/Sales multiple has been used. The peers are 888 Holdings Plc (EV/NTM Sales was 1.47x), William Hill Plc (EV/NTM Sales was 1.54x), Playtech Plc (EV/NTM Sales was 1.15x), Quixant Plc (EV/NTM Sales was 0.94x) and Sportech Plc (EV/NTM Sales was 0.30x). The Average of EV/NTM Sales of the Company’s peers was 1.08x (approx.).

As per other valuation metrics, Price/Cash Flow and EV/EBITDA multiples of the Rank Group PLC are currently lower as compared to the corresponding multiples of the Entertainment industry. It reflects, shares are undervalued as compared to the industry.

Business Outlook

Rank Group has started reopening the majority of venues after lockdown easing while the short-term business impact is expected. However, it has been performing resiliently with decisive actions to curtain cost. The positive impact of Coronavirus Job Retention Scheme in Belgium and Spain will account for approximately £8 million per month. It is also getting the benefit of £1 million per month from the business rates holiday. Moreover, the good progress had been made with an integration of Stride in H1 FY20, and hence, £13 million of cost synergies is expected though largely to flow in FY21 and FY22. In FY20, the Company expects to deliver underlying operating profit to be in the range of £113 million and £123 million (including the impact of IFRS 16).

Further, it is aiming to become an International Gaming Company with £1 billion in revenue. It will be supported by the transformation programme in place, which would increase the focus on the customers, grow their digital presence, drive cost efficiencies, and improve organisational capability.

Certainly, dividend matters as it does not only provide income for pensioners but also underpin the share price valuation. For dividends, it is also important to look beyond the next 12 months since 2020 has been an unprecedented and unusual year. Despite the uncertainties, Rank Group has been maintaining a progressive dividend policy. Moreover, H1 FY20 performance has already set a strong momentum for growth in H2 FY20 and beyond.

(Source: Presentation, Company Website) 

Over the course of 4 years (FY15 - FY19), the Company's dividend surged from 5.60 pence per share in FY15 to 7.65 pence per share in FY19. Compounded annual growth rate (CAGR) stood at 8.11%.

Considering the decent profitability margins, growth in dividend and support from the valuation as done using the above method, we have given a “Buy” recommendation on Rank Group at the current price of GBX 136.65 (as on 28 August 2020, before the market close at 12:45 PM GMT+1), with lower-double digit upside potential based on 1.08x EV/NTM Sales (approx.) on FY20E Sales (approx.).

 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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