Investment Column: All bets are on with Rank Group's shares

Rolls-Royce; Finsbury Food Group
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The Independent Online

Our view: Buy

Share price: 117p (+7.8p)

Bingo has often been the butt of jokes about the blue-rinse brigade and the inhabitants of sink estates over the years, but it appears to be making a comeback and more of the population seem to be calling out "legs eleven".

The gambling group Rank said yesterday that it had this year enjoyed growth in customer visits to its 103 Mecca Bingo sites for the first time in more than a decade. Equally important was that these customers increased their spend per visit, which led to a 2.1 per cent rise in Mecca's revenues in the six months to 30 June.

The group boasted of another first with more than 1 million customers at its 35 Grosvenor Casinos in the UK during the six months in a further sign of consumers breaking free of their recessionary shackles. In fact Grosvenor Casinos was the engine room of its growth as it delivered a 19.7 per cent increase in operating profit, boosted by its new G Casino format.

This helped Rank post a marginal uplift in adjusted pre-tax profit to £25.1m during the period, although this was marginally behind City consensus forecasts. Investors will also have cheered by the reinstatement of its dividend, at 0.74p, after they were left empty-handed last year. In terms of its long-term health, Rank reduced its net debt by a further £53m to £133.4m, driven by improvements in operating cashflow and VAT refunds from the Government.

Rank could be vulnerable to a relapse in consumer spending as the Government's austerity measures take their toll on household budgets, although the company argues its relatively low average transaction spend will provide it with shelter.

Another potential headache could be a renewed wave of regulation from the coalition Government, although the early indications are of a light touch approach.

Overall, we think the risks are more than offset by growing momentum at Rank, as it continues to modernise its estate after the recession. We also think that investors' numbers could come up with a fairly valued 2011 price-earnings ratio of 12.7 times. Buy.

Rolls-Royce

Our view: Buy

Share price: 585.5p (-2p)

Rolls-Royce is among the FTSE 100's band of defensives. It's one of a handful of stocks that, because they're seen as solid investments, tend to attract interest during periods of turbulence. And indeed, if you chart the share price against the broader blue chip index, it has done far better this year. This divergence could be a useful guide for future performance, in our view, as, firstly, many in the market remain concerned about the trajectory of global economic growth and, secondly, Rolls-Royce looks set to strengthen.

The company's half-year results offered much in the way of good news. Profits were better than expected, its marine unit boasted a strong trading performance, and it raised its guidance for the full year. All this, coupled with the diversity of the company's portfolio and its international reach, suggests that even if the macro picture darkens again, Rolls-Royce should remain on a firm footing. In fact, it is likely to grow, as its very much alive to the opportunities presented by fast-growing emerging markets. This should continue to drive interest in its shares.

The bears, of course, would argue otherwise. Execution Noble, for example, highlighted that Rolls trades on a multiple of 15.5 times forecast earnings for 2010, putting the stock at the top of end of its historic range. While that may worry some, we think it's just a reflection of the market's preference for what is a relatively safe and promising investment. Keep buying. Buy.

Finsbury Food Group

Our view: Buy

Share price: 17.5p (unchanged)

There were no candles to blow out on a cake to celebrate Finsbury Foods' performance yesterday as it reported a fall in revenues in the year to June.

Indeed, it is the group's cake division that has caused the problems, as sales fell by 4.1 per cent. No party, no icing on the cake and no interest from investors.

Not quite. We would be buyers. Efficiency savings have enabled the group to deliver profits in line with expectations, while the company is operating within its banking limits.

This demonstrates a group managing a difficult situation well, and it is a message that the market is picking up on. Finsbury's shares are down by more than 25 per cent in the past year, but have put on 15 per cent in the past month.

We would happily jump on the bandwagon. There is no divi, but the stock trades on a price-earnings ratio of just 2.6 times – it is still as cheap as chips. Buy.

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