Boost for Rank as trading starts to rally

Leisure Report, Nov, 2008

Following a sustained period of very difficult trading, The Rank Group (Rank) said it had seen a "much stronger relative performance" in recent weeks.

Announcing trading results for the 41 weeks to 12 October 2008, Rank said that, on a like-for-like basis, group revenue declined by 8% for the period, but noted that, during the last six weeks, the group has delivered a much stronger relative performance, with like-for-like revenue up by 5%.

The firm said this reflected both the timing of the Gambling Act (implemented on 1 September 2007), and the actions taken to address the negative effects of the Act.

However, trading at Top Rank Espana remained "challenging", while Blue Square continued to be held back by the disappointing performance of its sportsbook operation.

In Mecca Bingo, like-for-like revenues declined by 12% during the first 41 weeks, with admissions down 12% and spend per head level with the comparable period last year. In the six weeks since the start of September 2008, like-for-like revenue grew by 2%, with an 8% rise in spend per head offsetting a 5% decline in admissions.

Mecca Bingo's recent improvements reflect the benefits of a number of previously announced initiatives. In particular, Rank has gained licensing permission for 83 adult gaming centres located within Mecca Bingo properties, of which 64 are now operational. This has enabled the group to increase the number of B3 jackpot gaming machines it operates from 406 at the start of the year to more than 660 at present.

The adult gaming centre development programme has been undertaken within guidelines established by the Gambling Commission and with the approval of local licensing authorities, the firm said.

The performance of the Spanish bingo clubs business, Top Rank Espana, continued to be affected by the difficult prevailing economic conditions in Spain. In local currency, revenue declined by 4% with admissions and spend per head each down by 2 %. This was offset by the strength of the Euro against Sterling, which resulted in a 6% increase in reported revenue.

At Grosvenor Casinos, like-for-like revenue declined by 3% in the first 41 weeks of the year, with admissions down 14% and spend per head up by 10%. In provincial casinos, revenue was 10% lower, with admissions down 15% and spend per head up 6%. In London, revenue was up by 1%, with admissions down 9% and spend per head up by 12%.

In the six weeks since the start of September 2008, like-for-like revenue grew by 14%, with a 33% rise in spend per head off-setting a 14% decline in admissions. In the provincial casinos, revenue declined by 1% with 19% growth in spend per head offsetting a 17% decline in admissions. London casinos grew revenue by 33%, largely as a result of average win margin returning to more normal levels, with spend per head up 41% and admissions down 6%.

Later this month Rank will open the G Casino in Aberdeen, its first casino in Scotland and the sixth in Britain under the brand. Rank has closed its Grosvenor Casino in Moortown, Leeds. The small casino has been loss-making since the government's decision to make a substantial increase to rates of casino gaming duty in last year's Budget. Rank will retain the licence for the purposes of future development.

Blue Square, the interactive gaming business, grew revenue by 1% during the first 41 weeks of the year. Gaming achieved 7% growth in the period, led by a strong performance from meccabingo.com. Revenue from sportsbook operations declined by 11%, reflecting the competitive nature of the market.

In September 2008, Rank wrote to Her Majesty's Revenue and Customs (HMRC) to advise that, consistent with the ruling of the Duties & VAT Tribunal in May 2008, it would no longer pay VAT on games of interval bingo. This is expected to result in an annualised cash benefit to the group of around 6m [pounds sterling], with effect from July 2008. As HMRC has appealed the tribunal's decision (with the High Court due to hear the appeal in March 2009), "it is not our intention at present to recognise the revenue or operating profit benefits in the group financial results", Rank said.

In January 2009, Rank's 167.7m [pounds sterling] convertible unsecured loan stock matures. It remains the firm's intention to redeem the bond from the available headroom under existing banking facilities, which are committed until 2012.

The figures were broadly welcomed by the market, with the weight of opinion suggesting the group may well have seen the low point as far as smoking ban and regulatory-based depressed trading may be concerned, and could benefit materially from VAT rulings and potential future regulatory changes.

Investec has a 'hold' rating on the shares, with a 95p target price, while Evolution Securities and Numis are more positive, both placing a 'buy' rating on the stock. Numis' target price is 75p, while Evolution has a 120p target, based on "where we see fair value for a bid ... although we acknowledge that in current markets, shareholders may be inclined to accept less than fair value."