Although I was perhaps prematurely dismissive of casino and bingo venue operator Rank Group (LSE: RNK) a while back, the stock’s performance in 2018 suggests I may have actually been onto something. Since the start of the year, the Maidenhead-based firm’s value has fallen almost 30%.
Does this make it a great contrarian play? Today’s full-year results would suggest not.
Fair value?
Despite being in line with management and analyst expectations, the numbers certainly weren’t pretty.
Revenue fell 2.3% to £691m in the year to the end of June with pre-tax profit tanking almost 41% to £50.1m.
Much of this appears to be the result of a low win margin and “extreme weather” impacting on the company’s Grosvenor casinos. Had it not been for a focus on cost control at its Mecca sites, one imagines the numbers would have been even worse. As they were, venue revenue and operating profit were both down, by 3.9% and 4.5% respectively.
Arguably more concerning, however, was the slowdown in growth at Rank’s digital offering. A 9.9% increase in revenue may not sound bad, but any loss of momentum is troubling when you consider that more of us are going online for a gaming fix rather than visiting traditional bricks and mortar sites.
In truth, bright spots were few and far between. Aside from recent acquisition YoBingo “performing strongly“, a 25% reduction in net debt (to £9.3m) and a modest, 2.1% rise to the dividend were the only other things to catch my eye.
Not that Rank’s board seems overly concerned, stating that it had “full confidence” in the company’s strategy and that expectations for its financial performance in the current financial year hadn’t changed.
Admittedly, at 11 times forecast earnings, stock in Rank is approaching what I consider fair value. The 4.5% yield looks secure for now and might be regarded as adequate compensation while relatively new CEO John O’Reilly does his best to turn things around and realise what he regards as the company’s “underlying potential“.
Time will tell if his tenure proves successful. Considering the huge competition it faces from online competitors, however, I still think there are better contrarian opportunities elsewhere in the market.
A screaming buy, Rank is not.
A growth-focused alternative
As long as you don’t mind high valuations and aren’t fussed about receiving much in the way of dividends, I think a far better gaming-related option at the current time would be Quixant (LSE: QXT).
Last month’s trading update from the computing platform and monitors provider contained few surprises with revenue and pre-tax profit being in line with management expectations for H1. Interim results are due on 19 September.
Having traded within the 400p to 450p range for the majority of the last year, Quixant’s shares look fairly fully-priced at 23 times expected earnings. Nevertheless, there could be further upside ahead if — as CEO Jon Jayal suggests — revenue returns to its traditional second-half weighting. A PEG ratio of 1.4 for the current year also implies that the shares aren’t overly expensive considering the company’s growth potential.
In addition to this, Quixant’s return on the capital it invests — a key metric for determining a company’s quality — was also far higher last year compared to that achieved by Rank (31% vs 16%). Taking this and a robust balance sheet into account, I know which stock I’d prefer.
