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UK gaming and gambling companies are almost unrecognisable from a decade ago — with one exception. That is casino and bingo hall operator Rank, That is casino and bingo hall operator Rank, which is largely UK focused and, while it’s investing heavily in digital, has a predominantly physical presence.
Elsewhere, a succession of mergers and acquisitions has transformed groups into largely digital operators with slick gambling apps targeting online audiences. They have also expanded into international markets.
For example, the US accounts for 40 per cent of revenues at Paddy Power and FanDuel owner Flutter Entertainment, with the latter switching to a New York listing last year. Ladbrokes owner Entain owns 50 per cent of US-based BetMGM. These groups all gained a strong foothold in the US following its decision to lift strict restrictions on sports gambling in 2018.
Evoke (formerly 888) has retreated from the highly competitive US — but still makes a third of its revenues outside the UK.
One thing that hasn’t changed about the sector is its “sin stocks” label — shares in companies whose products or services are considered unethical or immoral. As a result, the industry is regularly at the receiving end of government interventions to tackle problems such as addiction and debt, and rumours around tax raids.
Given the UK’s straitened finances, some MPs say a mooted increase in remote (online) gaming duty from 21 per cent to 50 per cent would be fully justified and the money should be funnelled into higher welfare spending. The Treasury receives around £3.5bn annually from betting and gaming duties and the threat of a tax raid has caused some share price wobbles.
Rank, however, has a few cards up its sleeve. Most of its revenues are generated from in-person games; revamps of its venues are drawing in more customers and new UK rules for land-based casinos passed last month will allow it to install greater numbers of gaming machines.
BUY: Rank (RNK)
The share price has been on a steady upwards trajectory over the past six months, writes Erin Withey.
Despite delivering a solid 11 per cent rise in net gaming revenue for the year and a 38 per cent boost to underlying operating profit, market reaction to Rank’s full-year results was underwhelming, with the share price pulling back on the day.
Though the gambling group’s strong numbers showed outperformance across all divisions, this only partially sated investor expectations following an extended rally in which the share price has doubled over the past year.
With a final dividend of 1.9p per share, bringing the total dividend for the year to 2.6p, the group’s board was able to deliver an improvement from the previous year (85p) in which the payout was reinstated.
While there are potential issues from the Gambling Act Review and additional employer national insurance costs, land-based casino reforms passed in July will enable the group to broaden its offering of gaming machines and sports betting.
Free cash flow remains strong, and with a price/earnings ratio of 15 times, this remains an attractive prospect.
HOLD: International Workplace Group (IWG)
Shares in the serviced office provider clicked into reverse after management said that annual cash profits would come in at the lower end of guidance, writes Mark Robinson.
The Swiss-based group (formerly Regus) also said that “the shift towards hybrid and more localised working is propelling our business forward with the fastest growth that we have ever seen in history”. Yet group revenues receded at the half-year mark and net margins remain painfully thin.
The combined cash outflow from the repayment of convertible bonds and the purchase of Treasury shares came in at $72mn (£53mn), slightly in advance of reported operating profits, but a pointer to how elevated financial commitments drag on profitability.
It’s understandable why shares in IWG were swept along by pandemic-fuelled assumptions on hybrid working, but they started their downward march in March 2021. The shares have been trundling along since, and now change hands at a 26 per cent discount to the FactSet consensus target price, but it’s difficult to envisage any near-term share price catalysts.
HOLD: PensionBee (PBEE)
The pensions consolidator is still scaling up its operations, writes Mark Robinson.
PensionBee is looking to tap into the US retirement market through partnership with State Street Investment Management. PensionBee expects its marketing investment stateside to reach $5mn (£3.7mn) during 2025.
By comparison, PensionBee allocated £7.6mn in UK advertising and marketing expenditure in the six months to June. Although the number of clients on the app increased by 14 per cent year on year to 286,000, unit acquisition costs crept up by 4 per cent to £251.
The group continued to benefit from high retention rates despite the periodic market volatility in the first half. Net inflows decreased by 12 per cent to £423mn, but strengthening asset pricing fed through to an increase in assets under administration to £6.3bn.
The shares pulled back on results day as the market sought to get to grips with how a 23 per cent rise in revenues can give way to a 44 per cent increase in adjusted losses. But the group is still developing and investing in its brand. Management pointed out that this is “inherently long-term in nature”, so patience is required.
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