Investment Column: Investors should try their luck with Rank
Friday 26 February 2010
Our view: Buy
Share price: 98.05p (+3.9p)
Rank Group, the owner of Mecca Bingo, rejoiced in December after the Chancellor said the duty on the earnings of bingo operators would be reduced from 22 per cent to 20 per cent in spring 2010.
Yesterday, the operator celebrated again after delivering adjusted pre-tax profit up by 19.8 per cent to £48.5m for the year ended 31 December, which was ahead of City expectations and driven by a record performance from its Grosvenor Casinos and Mecca Bingo halls.
The company said the 7 per cent uplift in revenues to £220m at Grosvenor Casinos was fuelled by a "significant increase" in customer traffic, while Mecca Bingo – which accounts for more than 40 per cent of group revenues – was boosted by a rise in average spend per visit that offset a modest decline in customer visits.
Over the year, the company also benefited from the launch of its Mecca "Full House" concept, an area within clubs that combines social gaming, such as After Dark Bingo, with food and drink, in order to extend operational hours.
The group also yesterday touted a victory at the High Court – concerning a claim that machine income between 2002 and 2005 should not be liable to VAT – which could be worth as much as £26m plus interest to Rank.
There were plenty of other reasons why potential investors may fancy a punt on Rank. For starters, Rank's chief executive, Ian Burke, put his money where his mouth is by buying £100,000 worth of shares yesterday, demonstrating his confidence in the business.
His decision could have been influenced by Rank's shares trading on a relatively modest 2010 estimated price to earnings ratio of 10.7 times.
Above all, Rank cheered the City by resuming its final dividend – at 1.35p – following no payment in 2008. Buy.
Our view: Hold
Share price: 104.2p (-9.1p)
As everyone knows, the green shoots of economic recovery are struggling to make themselves seen. With the economy growing at just 0.1 per cent, the UK is anything but robust.
That is why the recruitment group Hays yesterday lauded the fact that it has started to recruit again in its Asia-Pacific region, where is makes 63 per cent of its profits. Announcing pretty woeful first-half numbers, including a 93 per cent slump in profits, its chief executive, Alistair Cox, said: "The world does feel a bit better today than it did three months ago; but it's not a full-blown recovery, far from it."
The economic optimists may well sniff a bargain, although as the watchers at Panmure Gordon point out, Hays's discount to the rest of the sector may not be as juicy as it might be: "On peak earnings Hays is trading on 9 times earnings per share, which compares to Michael Page on 13 times, although the latter is much more geared into a recovery with about 80 per cent exposure to the perm market."
A Hays spokesman pointed out that investors are waking up to the international dimension of the business and that the UK's somewhat depressing outlook is becoming less important. Maybe, but that would run rather contrary to the 8 per cent drop in the share price yesterday.
Hays would be a sell, based on the poor UK job market, which we reckon is still important for investors. But the dividend yield, at an impressive 5.69 per cent, is too strong to ignore. Hold.
Our view: Buy
Share price: 109p (+5.4p)
The engineering group GKN posted full-year figures yesterday showing a net loss of £36m. The results may not sound good, but they not only beat analyst expectations but also show a massive improvement on the £109m loss in 2008.
The big winner in 2009 was the aerospace business. While the division supplying components and powdered metals to the car industry suffered from the sharp decline in automotive sales across the world, the aerospace group saw sales up by 48 per cent, helped by the purchase of the Filton wing facility from Airbus.
The group also instituted a major restructuring effort, expected to cut costs by £37m annually and already pushing all divisions into profit in the fourth quarter. Add in free cash flow of £136m, from an outflow of £38m the year before, and debt cut back from £708m to £408m by a rights issue, and the company has made laudable progress in these interesting times.
Given the tricky conditions, GKN will not pay a dividend, but does expect an interim payment in the year ahead. And Evolution Securities is expecting a price-earnings ratio of 11.3 times on next year's forecasts. Taken together, GKN have plenty of room to rise. Buy.
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