London-listed operator Rank Group reported a net loss of £101.2m in the six months ending 31 December 2022, despite a 2% increase in group revenue to £338.9m.
Despite the modest year-on-year revenue increase, the operator reported a £101.2m loss for the first half of its financial year 2022/23 as a result of rising costs for energy, wages and other expenses.
The company’s land-based venues business saw a 1% decrease in revenue from the prior-year period and a 20% decrease from H1 2019/20, the last comparable period which was unaffected by COVID-19.
Revenue from the segment totalled £236.6m.
Digital NGR, meanwhile, showed a 9% increase from the previous year and a 1% increase compared to H1 2019/20, at £100.8m.
Rank Group reported strong holiday trading, specifically in its Grosvenor venues, but noted that it remains cautious about the outlook for H2 given current economic conditions.
The company previously issued a trading update in December and lowered its profit forecast.
Rank Group’s operating margins have been severely affected by rising costs for energy, wage inflation, and other expenses.
Average wage increases across the company were 8%, with some employees receiving 9% increases.
Rank said that in 2022/23, costs are expected to increase by about £45-50m, with energy costs projected to be £31m for the full financial year.
Revenue growth was mostly driven by a 25% year-on-year increase in revenue from the firm’s Enracha venues business in Spain to £17.7m, in addition to its 9% increase in digital revenue to £100.8m.
Meanwhile, revenue from the Grosvenor venues declined 5%, while revenue from its Mecca bingo venues grew by 4% to £65.5m.
Underlying like-for-like operating profit for H1 came in at £4.2m compared with £24.9m in the same period of the previous year.
In a conference call with shareholders, Rank Group CEO John O’Reilly highlighted that both Rank’s Mecca and Grosvenor venues were affected by the pandemic and have not yet fully recovered, but the company is focused on returning them back to pre-pandemic levels.
Meanwhile, O’Reilly highlighted that Rank’s digital business continues to perform well.
All of the group’s brands are now operating on Rank’s proprietary RIDE platform, with Grosvenor being the last brand to complete the migration in H1 2022/23.
“We are now in control of our future from a technology standpoint and have the vision and capability to deliver a market leading cross-channel customer experience in both Grosvenor and Mecca alongside strong and growing support brands in the UK and internationally,” he added.
Rank is now looking forward to the publication of the UK Government’s gambling review white paper.
“Casino and bingo venues are in need of long overdue modernisation of outdated regulation which heavily restricts the customer proposition.
“This appears to be widely recognised within the debate surrounding the Government’s review and we are hopeful of a positive policy outcome followed by the much-needed rapid implementation of new regulation,” O’Reilly said.
Rank Group CEO John O’Reilly: “Since lockdown we have faced a huge increase in energy costs, high wage inflation, the slow return of overseas visitors to London and the increasing pressure on consumer’s discretionary income. We have also experienced a continued tightening of the regulatory environment, particularly in regards to affordability restrictions on customers.”
Ivor Jones of Peel Hunt asked about Rank’s capital expenditure, which totalled £24.2m during the period, up from £13.4m in H1 2021/22.
He wanted to know where the capital was invested.
CFO Richard Harris said around 50% was invested in Grosvenor venues and a significant portion in IT platforms, which supported the 9% growth in digital business.
Harris also mentioned that Rank invested in energy efficiency measures, which it expects to pay off in the next six months.
The company also shifted all of its electricity consumption to renewable energy sources.
Trading update and outlook
Rank reported a positive performance during the holiday season and the first few weeks of January 2023, but acknowledges that financial pressures may impact customer spending in the coming months.
Despite this, the company expects to see continued growth in its digital operations and is maintaining its forecast for full-year operating profit to fall within the range of £10m to £20m.
Rank’s H1 results had little impact on stock prices as the decrease in profits had been already communicated in December.
Analysts from Peel Hunt viewed Rank’s performance as broadly positive. Although the firm noted that there was not enough in today’s statement to support an upgrade, “trading is encouraging,” it said.
However, Peel Hunt added that at a time “when energy prices are high, consumer confidence is low and multi-year investments are beginning to pay off”, it is the wrong time to become more cautious.
Therefore, the firm increased its target price from 90p to 100p and changed its recommendation from Buy to Add.
Shares in Grosvenor Casino and Mecca Bingo operator the Rank Group fell by more than 9% in early trading (16 December) after the operator released a trading performance report for the five months ended 30 November 2022.
Across the group, like-for-like NGR came in flat at 1% year-on-year during the five-month period, reflecting growth across Rank’s Mecca, Enracha and Digital assets, although this was offset by a decline in revenue from its Grosvenor Casino venues.
The operator said while there had been some improvement in trading in recent weeks, its financial Q2 (three months ending 31 December 2022) trading has been “weaker than expected,” with weekly average NGR of £5.8m just slightly ahead of the figures in Q1.
In particular, the effects of the FIFA World Cup, combined with unusually cold weather in the UK and the ongoing cost of living crisis, have caused lower visitor numbers in Grosvenor venues, while Rank has also seen a lower average customer spend per visit.
Mecca customer visit numbers were up 4% on the previous year, meanwhile, with the brand showing Q2 weekly average NGR in line with Q1.
Rank’s Enracha venues in Spain continued to perform strongly, it said, with NGR up 27% as its Spanish customer base was not facing the same financial pressures as those in the UK.
The operator’s Digital business segment continued to deliver good growth, it added, with NGR up 11% as a result of 10% growth in the UK – driven by the successful migration of Grosvenor’s online offering onto Rank’s proprietary technology platform – and 13% growth internationally, aided by the YoBingo and YoSports brands in Spain.
Grosvenor growing pains
Rank said Grosvenor venues had shown signs of improvement in recent weeks and that there are “robust” plans in place to drive revenue for the brand.
However, Grosvenor’s return to growth will take longer than previously expected due to challenges presented by macroeconomic conditions, Rank said.
Not least of those conditions is rising inflation and associated increases in operating costs, especially impacting expenses such as energy bills and employee salaries.
Rank said that total known cost increases for the year remained broadly in line with its expectations, with around £50m in expected extra costs relating to wage inflation, energy inflation and other price increases.
Rank now expects group like-for-like underlying operating profit for the year ending June 2023 to be in the range of £10m-£20m, with the main variable within that range being the performance of Grosvenor venues.
Rank’s underlying operating profit for financial year 2022 was £40m.
Rank Group CEO John O’Reilly: “Weak consumer confidence and pressure on disposable income is resulting in a tougher than expected trading environment for our UK venues businesses, particularly in Grosvenor, where we are seeing customers spending less per visit.”
“Due to the high operating leverage within Grosvenor, and its relative importance to the group as a whole, movements in its NGR will have a significant impact on the group’s operating profit for the year,” warned Rank in a statement.
Rank CEO John O’Reilly added: “Weak consumer confidence and pressure on disposable income is resulting in a tougher than expected trading environment for our UK venues businesses, particularly in Grosvenor, where we are seeing customers spending less per visit.
“Whilst we expect these challenges to continue to impact our recovery into the second half of the financial year, we have implemented a series of measures to deliver incremental cost savings and to drive revenues.
“We remain committed to our roadmap of investing in initiatives that will ensure the long-term recovery and prosperity of the group. These include delivering new products in our UK venues, enhancements to the design and facilities of some of our casinos and upgrades to the table gaming and electronic offering.
“Our digital team is now fully focused on delivering the improvements available to our UK and Spanish business following the successful migration of all our brands onto our proprietary platforms.”
Delay or defeat?
Off the back of the trading update, investment bank Peel Hunt has lowered its underlying operating profit forecast for the business from £43m to £14m, and its EBIT forecast from £65m to £44m.
Regulus Partners: “Unless customers are prepared to spend more on gaming overall, something has to give, and it appears to be giving in the land-based casino market as well as in higher spending bingo customers – the market and segment which happen to have the closest demographic overlap with higher spending online customers.”
For Peel Hunt, the trading update reflects “a delay not a defeat”, and while it pushes back its forecast of Rank’s recovery by a year, the bank reiterated its Buy recommendation and 90p target price for Rank shares.
Regulus Partners, meanwhile, took a less positive view of the update. It said Rank’s performance showed that the UK’s land-based casino sector was the most vulnerable area of the gambling market.
It pointed to slow growth in the UK market in recent years, alongside an increasing number of customers choosing to play online rather than in the land-based sector.
As a result, Regulus said: “Unless customers are prepared to spend more on gaming overall, something has to give, and it appears to be giving in the land-based casino market as well as in higher spending bingo customers – the market and segment which happen to have the closest demographic overlap with higher spending online customers.”
Regulus concluded that: “20 years of low inflation and slow customer adoption of online has created the impression that online growth is independent of land-based resilience; this is a false impression which Rank is now demonstrating, in our view.
“Overall, the UK gaming customer is still showing remarkable resilience, but the pace of consumer change is now accelerating dangerously.”
Far from fine
Earlier this week, Rank subsidiary Daub Alderney lost an appeal against the Gambling Commission relating to a £5.9m fine issued in September 2021.
The fine was issued for social responsibility and AML failures on Rank’s part, but the operator subsequently appealed to the first-tier gambling tribunal on the grounds that the penalty was excessive, unfair and disproportionate.
That claim was rejected by the tribunal this week, as the fine was deemed a “fair and reasonable regulatory response.”
Shares in the Rank Group slipped by more than 9% today (13 October) despite the operator announcing net gaming revenue growth of around 2% in the first quarter of its 2022/23 financial year (three months ended 30 September 2022).
The modest growth, which brought the firm’s overall NGR to £165.7m, was recorded following a 13% increase in digital revenue to £48.9m, while the company’s largest segment – its UK land-based Grosvenor Casino venues – saw revenue dip 5% to £75.3m.
Mecca Bingo venues in the UK fared slightly better, registering a 2% revenue increase to £33.3m while Rank’s Enracha land-based venues in Spain saw revenue grow 24% to £8.2m.
The dip in Grosvenor’s land-based revenue came in spite of an increase in visitor numbers, as the average spend per visit decreased across the group’s nationwide chain of casinos.
In London, revenue from Grosvenor venues actually grew by 21% as the casinos saw a 20% increase in the number of customer visits, but this growth was more than offset by a 17% revenue decline in venues outside London where customer spend levels were weaker.
Average weekly NGR for the Grosvenor brand was £5.7m, down 5% on the prior-year comparative period but up 12% against the previous quarter.
The firm’s digital brands helped mitigate some of the revenue reductions seen in the land-based sector, as the online Grosvenor brand performed well with 25% revenue growth, following its migration onto Rank’s proprietary RIDE platform in September.
Rank Group CEO John O’Reilly: “It is pleasing to see increasing visits in this new financial year together with strong growth in the digital business, where we are starting to see the benefits of investments in our proprietary technology platform and our cross-channel offering, with encouraging growth in both the UK and Spain.”
Mecca digital remained relatively flat with revenue up just 1%, while Rank’s Spanish online operations grew by 12%.
Rank said that consumer discretionary expenditure “is expected to remain under significant pressure this year,” as inflation remains high.
It added however that the recently announced Energy Bill Relief Scheme is welcomed by the group and, following its implementation, Rank expects energy costs in the current financial year to total around £34m, up from £23m in FY22.
Other inflationary pressures continue to present a challenge to the business, it said, particularly in the land-based sector as wage inflation, food price increases and supply chain pressures all continue to push up costs.
“It is pleasing to see increasing visits in this new financial year together with strong growth in the digital business, where we are starting to see the benefits of investments in our proprietary technology platform and our cross-channel offering, with encouraging growth in both the UK and Spain,” said Rank Group CEO John O’Reilly.
“The group has a number of key initiatives underway to improve long term revenues. These include some key refurbishment projects and new electronic roulette and jackpot games in Grosvenor; improving the gaming machine offering in Mecca; increased personalisation and a stronger live casino offering in the UK digital business and the recent launch of Yo Sports in Spain.
“The Group has the benefit of a strong balance sheet, enabling us to continue investing in the business through this period,” O’Reilly concluded.
Shares in Rank Group tumbled double digits this morning (20 June) after the operator published another profit warning to investors.
Rank Group had already issued investors with a trading update in April, which showed that its revenue levels during the three months ended 31 March 2022 – Q3 of Rank’s 2021-22 financial year – remained below pre-Covid levels across all business areas.
That update saw the firm’s share price slip from around 128p to around 107p. Today however, the operator began trading more than 17% down on yesterday’s close.
This morning, the firm’s share price fell as low as 82p – the lowest price since 2020.
Rank told investors that following weakened performance in the first months of the year, the performance of its Grosvenor Casino brand had begun to improve since April. However, that improvement was considerably weaker than expected, it explained.
This, it said, was principally due to a slower-than-expected return of high-spending, international visitors to the firm’s London-based casinos, continued softness in visitor numbers across the UK, and a lower-than-average casino win margin in the quarter to-date.
Performance across other business segments – principally Rank’s Mecca Casino brand in the UK and Enracha in Spain – has been broadly in line with management expectations, the business said.
Subject to normal casino win margins between now and the end of its financial year (30 June), Rank said it now expects like-for-like underlying operating profit (EBIT) for the year to total around £40m, lowered from previously issued guidance of £47m-£55m.
The firm’s preliminary results for the 12 months ending 30 June are expected to be released in August.
Peel Hunt analyst Ivor Jones: “It appears that key customers intend to return as soon as July, but it is hard to predict with certainty. A large minority of Grosvenor’s London revenue is generated from customers who are primarily based overseas.”
In a note sent to investors today, Peel Hunt analyst Ivor Jones announced a lowered target price for shares in Rank Group – reduced from 220p to 175p – but reiterated a Buy recommendation while the firm’s share price remains low.
The analyst also reduced financial year 2023 EBIT expectations from £91m to £77m.
Jones said he expects to revisit these expectations following the release of preliminary results in August, at which time Rank management will comment on initial trading during the start of financial year 2023.
Rises in visitor numbers, normalised casino margin, and the return of international and high-staking customers to Grosvenor venues will all be key metrics to look out for, which may signal an upturn fortunes.
Jones remained cautious with regards to the company’s recovery, however. “Overseas visitors to Grosvenor should come back, but Covid-19 restrictions remain in place in some key source markets and there have been other local disruptions,” he said.
“It appears that key customers intend to return as soon as July, but it is hard to predict with certainty. A large minority of Grosvenor’s London revenue is generated from customers who are primarily based overseas.”
Jones noted that domestic UK customers are also being impacted by macroeconomic factors currently affecting general consumer spending, while casino venues are being impacted by behavioural changes being felt across the night-time economy.
One key change which could help the business get back on the path to growth is an increased focus on Rank’s digital business division.
The firm’s online brands should complete their delayed migration onto an in-house platform this summer, Jones said.
Last month, Peel Hunt told investors that while Rank’s digital division accounted for just 9% of group EBIT in H1 2022, that figure could rise as high as 33% by financial year 2024.
The operator’s digital offering “is a major part of the Rank investment case,” according to Peel Hunt.