Rank Group PLC

Rank Group Plc (RNK) is an entertainment brand based on gaming. The company has its operations in Spain, Belgium and Britain. The company’s focus is to become the UK’s leading game operator. The company divided its operations into five reportable segments being Mecca Venues, International Venues, Digital, Grosvenor Venues and Central Costs.

On 30^th January 2020, the company will announce the interim results.

Trading update for the quarter to 30 September 2019 (as on 15^th October 2019)

(Source: Company Website)

The group has reported its trading update for the first quarter ended as on September 30, 2019. During the period under consideration, the group's gross gaming revenue (GGR), grew by 8 per cent and Net gaming revenue reported a growth of 10 per cent against the year-ago period. This was largely driven by decent growth recorded in the group's Digital and Grosvenor venues. NGR of Digital and Grosvenor venues grew by 16 per cent and 15 per cent respectively. However, on a like-for-like group’s Mecca venues reported flat NGR, because lower consumer footfalls were offset by a higher spend per visit.

Acquisition
During the quarter under review, the group completed the acquisition of Stride Gaming Plc and during the first quarter of FY20, the acquired group’s Net Gaming Revenue stood at £16.3 million, which was 15% lower against the year-over period, respectively. However, the group’s cash position at the end of the first quarter was at £25 million.

Financial Highlights (for the year ended 30 June 2019, £million)

(Source: Annual Report, Company Website)

In the financial year ending 30th June 2019, the company’s revenue increased by 1 per cent to £746.50 million as against £741.1 million in the financial year 2018. The increase in the revenue was driven by growth from all businesses in the second half of the financial year 2019. The company’s PBT (Profit before tax) stood at £34.6 million in FY2019 versus a pre-tax profit of £46.7 million in FY2018. The adjusted basic and diluted earnings per share stood at 14.8 pence in FY2019 versus adjusted basic and diluted earnings per share of 15 pence in FY2018.

Share Price Performance
 
Daily Chart as at October-22-19, before the market closed (Source: Thomson Reuters)

On 22nd October 2019, Rank Group PLC shares were trading at GBX 224 at the time of writing before the market close (at 8:45 AM GMT), down by 3.24% against the previous day closing price. Stock's 52 weeks High and Low are GBX 231.50/GBX 129.20. The company’s stock beta stood at 0.19, reflecting the lower movement of the stock as compared to the benchmark index.

Valuation Methodology
 
 

Key Risks
Regulatory and legislative regimes for betting and gaming in key markets are constantly under review and can change at a short notice; taxation risk (remote gaming duty, machine gaming duty, and gaming duty); progressive changes over time in retail consumer spending habits are resulting in lower numbers of customer visits; cyber-attacks can disrupt and cause considerable financial and reputational damage to the group; and the company is dependent on a number of third-party suppliers for the operation of its business.

Conclusion
In the first quarter of 2020, the stride's NGR reduced by 15% on last year, due to lower client acquisition volumes and decreased margins in the period. From the perspective of the market, the industry innovation slower than other sectors, resulting in customer expectations not being met; product innovation inhibited by the licensing regime; and mismatched product innovation drivers between suppliers and operators.

The company’s operations can be affected negatively due to ongoing uncertainties created over the Brexit, as it would disturb the business, in particular in the event of an unfavourable outcome in respect of any final agreements between the UK and EU. As the company operates in multiple geographies, its profits can be impacted negatively due to foreign exchange rate fluctuations.

The company’s P/E multiple is significantly higher as compared to the industry multiple, reflecting overstretched valuations. Currently, the stock is trading near the 52-week high, suggesting that the upside potential might be limited, and the company can face stiff resistance at the current level.

Based on the above rationale and support from valuation done using the above method, we have given a “Sell” recommendation at the closing price of GBX 231.50 (as on 21st October 2019) based on 1.05x Industry Median EV/Sales (approx.) on FY20E sales (approx.).
 
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.
*The “SELL” recommendation is valid for the current price as covered in the report (as on 22-October-19).

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