Is Rank Group a buy before it taps investors for cash?

• Rank Group has said it is considering raising cash from investors to bolster its balance sheet as the UK enters its second national lockdown, which will force the company to close its venues once again.
• Rank Group’s transformation programme was reaping rewards before the pandemic but has been derailed by lockdowns.
• Rank Group’s online services have benefited this year as more people gamble online during the pandemic, but it has not been enough to offset the severe falls in revenue from its casinos and bingo halls.
• Rank Group shares have plunged 69% since the start of the year whilst more traditional bookmakers with stronger online offerings have gained ground.

Rank Group to tap investors for cash

Rank Group, which runs the Grosvenor Casinos, Mecca Bingo Halls and a number of online gambling sites, has confirmed media reports that it is considering raising cash from investors by issuing new shares in the company.

It said the maximum amount of shares it will issue under equity placing – which it said is not guaranteed to go ahead - would be set at a maximum of 19.99% of its issued share capital. That is because companies are able to raise up to 20% of their value under a fast-track placing. Based on the company’s market cap of £339 million on 5 November, this could see it raise up to £68 million.

Why is Rank Group raising cash?

Rank Group is looking to strengthen its balance sheet to help it deal with the ‘unprecedented trading environment’ as the UK enters another lockdown.

The company said it had net debt of £297.5 million at the end of June and it had cash and cash equivalents of £125 million. However, its available cash was reduced by £30 million at the end of September when one of its facilities expired.

This means the amount of cash available to the company has fallen just as the second lockdown comes into place, which will force it to shut its venues once again.

How bad has the coronavirus been for Rank Group?

Rank Group has been implementing its ‘transformation 2.0 programme’ since late 2018, aimed at increasing revenue whilst cutting costs. The plan was starting to bear fruit before being derailed by the coronavirus that forced it to close venues in late March. In the eight months to the end of February 2020, Rank Group reported an 11% rise in net gaming revenue and a stellar 61% increase in operating profit.

But, despite the fact venues were only closed for the last three months of the financial year to the end of June 2020, the impact was huge. Whilst its online services have helped cushion the blow it has not been anywhere near enough to offset the financial impact of having to close its 140 venues in the UK and abroad.

Rank Group recognises the importance of growing its digital channels but remains committed to its physical venues. The company admits it is behind the wider market, stating over half of the UK gambling market has shifted online this year whereas digital services account for just 24% of the company’s revenue at present. However, it also says this highlights the growth opportunity it is pursuing.

The company’s online operations were bolstered by the acquisition of Stride Gaming for £116 million in October 2019. Although it funded that with debt, which is now weighing on the company, it also underpins Rank’s online growth ambitions. That is because Rank is using Stride’s technology to operate all of its online brands under one roof, allowing it to save around £15 million a year in costs. Rank is aiming to migrate its services, including meccabingo.com, to the Stride platform before the end of 2021.

Whilst Rank Group’s existing brands like Grosvenor and Mecca continue to deliver double-digit revenue growth online, the brands that were acquired under Stride have not performed as well as expected. Plus, the closure of Grosvenor sites has hurt its online revenue as it operates on a multi-channel offering. All in all, Rank said its legacy brands reported digital revenue growth of 23% in the year but overall digital growth was weighed down to just 11% by Stride.

The hit to the top line has fed through to the bottom. Operating profit in the year was down 40% and pretax profit plunged 66% and, again, whilst profits from online services have risen it has been more than offset by steep declines in profits from its venues, particularly Mecca Bingo Halls.

Rank Group’s recovery hindered by second lockdown

Rank Group was on the way to making a recovery since it started to reopen its venues in July and August, stating they were still generating cash despite significantly fewer customers coming through the door. Its Grosvenor and Enracha (in Spain) venues were generating cash while Mecca was breaking even despite revenue being 25% to 30% lower than usual. The fact its sites are mostly large in size means it has the ability to operate profitably even if has to operate at reduced capacity.

The recovery meant Rank Group was expecting overall cashflow to break even from September onwards, excluding money owed in deferred rent and duties. However, the start of a second lockdown will upend the progress it has made.

The second lockdown shouldn’t be as bad as the first for Rank Group. Firstly, it should be much shorter than the first one with the government aiming to end this lockdown at the start of December. Secondly, Rank Group has taken the actions needed to ensure shutting its venues doesn’t eat up as much cash. The company was burning through £25 million a month when it entered the first lockdown in March, but it had managed to get this down to just £10 million a month by the end of it. However, it is worth noting that was with the help of government support, such as the furlough scheme and the relief on business rates.

That suggests the cost of this second lockdown will be minor and can be comfortably covered by Rank Group’s existing cash resources. In turn, that means Rank Group has not waited until it is in trouble to raise cash, but instead is taking the opportunity to raise cash now whilst it is in a stronger position.

Where next for Rank Group?

Rank Group has admitted that debt is too high, but it is not in financial trouble and is choosing to raise cash now rather than wait until it is in dire need of money. It has already used its other levers before choosing to tap investors for cash, including selling off its Belgian business and suspending its dividend.

There is no escaping the fact that Rank Group makes most of its money from its physical venues. Importantly, it has proven it venues can still generate cash even at reduced capacity, but that doesn’t take away from the fact it will lose considerable sums so long as venues are forced to stay closed. Plus, whilst Rank Group’s online operations have helped soften the blow, they are not performing as expected right now. Still, this should improve as the Stride platform comes more into play next year.

The timing of the pandemic has not been kind to Rank Group. The company was on the right path by reporting strong top-line growth and even stronger expansion of the bottom line thanks to its transformation programme, but that progress is now being derailed – as will its plan to generate £1 billion in annual revenue by 2023.

How to trade Rank Group shares

Notably, most of the UK’s major gambling stocks have gained ground this year. Those with the greatest online exposure have rallied the most, with Flutter Entertainment up 48% and 888 Holdings up 68%. But even those with vast store networks like William Hill and GVC have risen by 6% to 7% during 2020 – whilst Rank Group has plummeted by a staggering 69%.

The dynamics are different for Rank Group, which focuses on the likes of casinos and bingo, than that of the other major gambling stocks, which are more driven by the likes of sports betting and have greater exposure to other major markets like the US. Still, the fact Rank Group’s share price has plunged so much whilst the wider market has risen suggests investors do not feel overly confident about the strength of Rank’s online operations and suggests there are concerns over whether its physical venues will become a burden for the business in a world dealing with coronavirus.

Having said that, brokers believe the sell-off this year has been overdone and that Rank Group is now undervalued. The three that cover the stock have an average Buy rating on the stock and a target price of 225p – which is 161% higher than the current share price.

You can choose to trade or invest in Rank Group shares. You can speculate as to whether you think Rank Group shares will rise and buy (go long) or, if you think they will fall, sell (go short) using either CFDs.

1. Create an IG trading account or open My IG to your existing account
2. Enter ‘Rank Group’ or its ticker, ‘RNK.L’ in the search bar and select it
3. Choose your position size
4. Click on ‘buy’ or ‘sell’ in the deal ticket
5. Confirm the trade

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