The acquisition of Stride Gaming looks to be a transformative one for Rank Group, writes Mark Watson-Mitchell.
Those of us who are old enough will remember the Adonis swinging the hammer at the giant gong will know that that was when he was announcing that the following film was produced by the Rank Organisation. Over the last 82 years Rank has always been big in the entertainment world. In its beginnings it was a top name in films. Over the intervening years it built up a diversified leisure and entertainment empire.
However, over the last 10 years, Rank Group (LON:RNK) has been concentrating on building up its gaming-based activities. The company’s aim is to be the UK’s leading multi-channel gaming operator, whether its punters are using its venues, or its online or mobile services. Or all three.
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It has been building upon its leading market positions in land-based casino and bingo venues. The acquisition of 19 casinos from Gala Coral in 2013 helped to boost its own Grosvenor Casinos into becoming the largest casino operator in Great Britain, in terms of the number of venues and by its total division revenue.
Its Mecca side, with 85 bingo venues, remains the second largest land-based bingo operator behind Buzz Bingo, which was formerly Gala Bingo. With a finite number of casino licences in issuance and the high capital costs of building casinos or bingo clubs, the Group is very well placed with regards to venue-based gaming in the UK. Its casino and bingo venues remain a very material part of its business, providing entertainment for millions of customers each year and generating a major part of the Group’s revenue and profits.
Rank’s aim is to excite and entertain its customers – and no it is not in the porn business. To do just that it is spending time, money and effort on adding innovative technology and services to its branded offer.
Gambling is an important sector of the leisure market, in terms of employment and its broader economic contribution, both in Great Britain and across the world, especially in Spain, Belgium, Gibraltar and Alderney. In recent years, the gambling industry has undergone significant change through regulatory and legislative reform, together with the rise of the internet and new technologies and a range of economic factors.
The Group considers that it has a number of key assets, including a portfolio of 149 venues, its membership-based models and its loyalty and reward programmes. It looks to duplicate its venues with new concepts and digital offerings through both online and mobile channels.
It is through the use of new technology that the Group expects to be able to increase its business and its efficiency. Using the brand loyalty that it enjoys as a marketing springboard the Group is a ready and willing investor in such innovations.
What has shown this to be a strong part of its strategy going forward is the recent £115m agreed cash offer that the company has made for Stride Gaming. Stride is currently the third largest online bingo operator in the UK, with an 11% market share. It operates a multi-branded strategy, using a combination of its proprietary and non-proprietary licensed software to provide online bingo, casino, slot gaming, and a social gaming mobile application. It has over 150 brands in its portfolio.
After the deal goes through the enlarged Group will have digital net gaming revenues of some £185m – using Stride’s strong digital technology platform. It will also boost Rank as the number two player in the UK online bingo sector with an 18% market share, whilst also helping to make Rank become the number six player in UK online gaming, with a 4% market share.
Buying Stride will effectively double the Group’s digital offering and pump some excellent technology into its own operations. Apart from its natural synergies, it is expected to save £13m yearly in cost savings within the next three years, it will also be earnings enhancing.
For the year to end June 2018 Rank recorded revenue of £691m, upon which it made £46.70m pre-tax profits, worth 15p per share in earnings and paying a 7.45p dividend. For the current year broker’s estimates suggest that a £751.05m revenue could generate £70.34m pre-tax, leaving earnings at 14.16p and a dividend of 7.74p per share. We will have to wait until August to see just how rosy the estimates will be for the coming year.
There are some 390m shares in issue, of which 219m are owned by Hong Leong Company (Malaysia), which is 56.1% of the equity. Other holders of note include: Threadneedle Asset Management (7.65%), M&G Investment (5.86%), Artemis (4.94%), Aberforth Partners (2.47%), Majedie Asset Management (2.25%), Norges Bank (1.97%), Schroder (1.07%), Legal & General (0.83%) and the Vanguard Group (0.78%).
With its shares currently trading at around the 157p level, the Group is valued at £612m. This highly cash generative business, with minimal debt, looks to be under-rated and its shares, I believe, are capable of easily achieving the 200p/220p level within the next year or so.