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Analysts’ earnings expectations have increased more than 20% over the last six months
Thursday 13 Feb 2020 Author: Martin Gamble

We think the transformation afoot at casino to bingo operator Rank Group (RNK) can continue to benefit the company and its share price.

This shift is not just about cutting costs, but changing the culture of the whole organisation, making it more dynamic in a bid to boost growth and achieve £1bn of revenue by 2023. For reference, last year to 30 June 2019 the company generated revenue of £695m.

Since July 2019 analysts have been busily upgrading their 30 June 2021 earnings per share estimates from 16.9p to the current 20.4p, up 21%. This puts the shares on a forward price-to-earnings ratio of 14.7 times, attractive given the growth potential

Rising expectations were not disappointed at the half year stage to 31 December 2019 when the company reported a 70% improvement in like-for-like operating profit to £55m, generated from a 10% increase
in gaming revenue to £377.5m.

The Grosvenor and international venues were the key drivers, showing operating profit up 137% and 29% respectively.

Digital is a key part of the company’s growth ambitions and the acquisition of Stride Gaming, (online bingo) brought a unique digital platform to the business that can be exploited in future.

Within the digital arm, Grosvenor and Mecca saw strong growth which reflects continued improvements in the customer experience with a highlight being the roughly 33% of Grosvenor revenues coming from multi-channel players. These players tend to have higher lifetime values and lower acquisition costs, making them more profitable.

CASH IS KING

Broker Shore Capital believes the digital division holds to the key to delivering future shareholder value and it is forecasting cumulative net cash inflow after dividends of around £200m by June 2023.

If achieved, it will provide the financial muscle to make acquisitions or return a decent chunk of capital (Shore Capital see a surplus of £450m) to shareholders.

Targeted investment in marketing is expected to see a return to revenue growth at Stride, propelling the digital division to an operating profit of around £50m over the medium-term, according to Shore Capital, more than doubling last year’s contribution.

While cost cutting represents low-hanging fruit and provides one-off gains, the fact that the business is also generating strong increases in revenue suggests the organisational changes have set the company on a sustainable growth trajectory.

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