Casino and bingo operator Rank (RNK) is trading 72% below pre-pandemic levels, and Shares believes the downside now looks limited while the upside from continued normalisation and the benefits from regulatory change could be significant.

Big changes are on the cards for the UK gambling sector following publication of the Government’s white paper in April which seeks to deter problem gambling and apply more onerous online affordability checks.

Yes, it means margins will take a hit across the board. However, casino and bingo operator Rank should see a revenue benefit as the new regulations level the playing field between online and land-based operators.

The upshot is that Rank has an opportunity to install 80 gaming machines per venue, four times the current limit as well as table games and electronic terminals with a random number generator akin to online gaming.

For the bingo sector the changes will remove the 20% restriction of B3 category machines (minimum £2 stake, maximum £500 prize) which is by far the most popular machine for Rank’s customers according to a recent management presentation.

Numis estimates Rank could generate an additional £35 million in annual operating profit. For comparison, the company is guiding for
2023 (June year-end) operating profit of around £20 million.

While the new legislation has still to be passed, the sector is preparing as if the recommendations will be implemented.

Rank saw its share price jump from circa 73p to 100p when the Government’s white paper came out, helped by analysts flagging the potential for ‘material’ upgrades to earnings forecasts, yet the shares have slipped back in recent months, presenting a good opportunity to buy.

The casino sector has taken longer to bounce back from the pandemic than other leisure areas as overseas visitors have been slower to return to the UK.

Spiralling energy costs have also put a big dent in margins. But there are positive signs appearing and the drag from high energy prices appears to be abating.

Strong Christmas trading across the Grosvenor casino estate continued into the start of 2023 and a third quarter trading update in April confirmed the positive trend has accelerated.

Third quarter like-for-like sales increased 13% to £174.4 million with venues up 12% and digital up 16%. Grosvenor’s like-for-like revenues increased by 15% driven by growth in visitor numbers.

The Mecca bingo estate recorded like-for-like sales growth of 9% in the quarter driven by a 4% increase in visitors and 5% increase in spend per visit.

Meanwhile, the consensus earnings estimate for both 2023 and 2024 has started to move up for the first time in over two years for Rank.

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