Rank is turning its business around. Are the shares a buy?
If you hear the phrases "Kelly's Eye", "Clickety Click" or "Two Fat Ladies" you're playing bingo, a popular form of gambling around the world. But the old bingo nicknames aren't very popular today with the major bingo operators after they realised that by using electronic random number generators and omitting the nicknames they could fit more games into the same amount of time, so increasing their profits.
The biggest operator of bingo halls in Britain is Rank Group (LSE: RNK). Rank was formed in 1995 as the successor to J. Arthur Rank Organisation, one of the mainstays of the post-war British film industry, best known for the "Gongman" logo and clips of Bombardier Billy Wells striking a huge gong at the start of a Rank film.
Rank has had a tough few years and eliminated its dividend in 2008 to preserve cash but the company now looks to have turned the corner.
Not Only Bingo But Also Hamster Racing
Rank severed its connections with the film industry back in 2000, selling Pinewood Studios and the Odeon cinema chain. Rank has also sold its other non-gambling businesses including the Hard Rock Café which was bought by the Seminole Tribe of Florida. Today Rank is wholly focused upon providing gambling services to its many customers in Britain and Europe.
Rank splits its businesses into four divisions, the best known of which is Mecca Bingo with 102 bingo halls in towns and cities all over Britain. Mecca Bingo, still the group's most profitable business, is being caught by the Rank's fast-growing Grosvenor Casinos which operates some thirty-five casinos in Britain and two in Belgium.
Rank's two smaller divisions are the 11-strong Top Rank España chain of Spanish bingo clubs and Rank Interactive; the internet bookmaker Blue Square which also operates Rank's online bingo and casino interests.
Blue Square is best-known as the sponsor of the Conference tier of English professional football, but it came to the attention of many in the gambling community during the foot-and-mouth epidemic in 2001 which forced the cancellation of horse meetings for several months. To cater for frustrated punters Blue Square organised the first ever series of professional hamster racing. Don't ask me about hamster form though!
Gambling: No Longer Recession Proof?
Gambling has traditionally been a recession-proof business since during the bad times many people will maintain or even increase their bets as a form of escapism. However, this theory has during the current recession which has hit many gambling businesses quite badly.
For example, Ladbrokes (LSE: LAD) recently announced that its profits for 2009 were down by 32% on 2008 and it has stopped paying dividends. Similarly William Hill (LSE: WMH) reported an 80% fall in earnings per share for the same period. Gambling ain't what it used to be.
Rank's businesses have performed fairly well during the recession, in particular Mecca Bingo's turnover increased slightly whilst its profits fell. Grosvenor Casinos' 19.3% profits increase was singled out in Rank's 2009 latest annual report where Grosvenor "continued to be the main driver of growth."
The table below shows how Rank's four divisions have performed during the past two years (figures are in £ millions).
| Division | 2009
profit | 2008
profit | 2009
sales | 2008
sales |
|---|
| Mecca Bingo | 32.3 | 37.9 | 233.0 | 227.6 |
| Grosvenor Casinos | 30.9 | 25.9 | 220.0 | 206.2 |
| Top Rank España | 5.6 | 6.9 | 36.2 | 36.2 |
| Interactive | 7.5 | 7.6 | 50.8 | 52.6 |
| TOTAL | 76.3 | 78.3 | 540.0 | 522.6 |
Rank's earnings per share record and dividends for the last five years are listed in the table below (the figures for 2005 and 2006 are adjusted for the 18 for 25 share consolidation in early 2007). Rank prefers the adjusted eps figure which omits exceptional items and other one-offs.
| Year | 2009 | 2008 | 2007 | 2006 | 2005 |
|---|
| Basic eps | 9.0p | 6.5p | 7.3p | 14.3p | (24.2p) |
| Adjusted eps | 8.9p | 7.3p | 7.4p | 3.7p | 3.9p |
| Dividend per share | 1.35p | Nil | 2.0p | 4.3p | 11.0p |
With the current share price of around 112p the shares are on a historic price-earning ratio of about 12.4 and yield 1.2%.
Rank's balance sheet carries some £250 million of debt, with its total liabilities £453.9 million, compared with assets of £485.3 million, so if you're an investor who likes a lot of tangible assets you'll give Rank a wide berth given that its £31.4 million of net assets support a market capitalisation of around £440 million.
Thankfully Rank's shareholders don't have to worry about a final salary pension scheme deficit because Rank's transferred its pension liabilities to an insurance company in June 2008.
The gambling market has become ferociously competitive in recent years with the emergence of internet betting. Mecca Bingo in particular faces some intense competition from online bingo as well the interactive bingo channels you can find on some of British Sky Broadcasting's (LSE: BSB) television channels. However, the social nature of the "bingo night out" should provide some protection; despite what some people might say playing bingo in front of a computer is not a social activity.
Rank's other businesses are facing strong competition from other casino operators, bookmakers such as Betfred, the Irish bookie Paddy Power (LSE: PAP) and spreadbetting firms like IG Group (LSE: IGG). Then there's the increasing power of the betting exchanges, in particular Betfair, who I suspect pose the greatest long-term threat to the existing gambling industry.
In conclusion, Rank's shares are fairly priced, given the highly competitive nature of the gambling business.
More from Tony Luckett:
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> Tony owns shares in Ladbrokes.
