Broker snap: Rank should crank up expansion

20th Sep 2010 12:05

Having weathered the storm of the recession it is time for casino, bingo and online betting operator Rank to kick on deliver sustainable growth, KBC Peel Hunt reckons.Peel Hunt analyst Nick Batram fancies Rank's chances, as it has leading positions in markets with high barriers to entry. The broker thinks that Rank could increase its UK casino estate by around 40% while around 45% of the bingo house estate to the Full House concept. "It has the balance sheet and a clear opportunity in casino, while Full House could accelerate growth within bingo," Batram suggests. "Potential corporate activity also adds spice," Batram notes.Expanding along the lines Peel Hunt suggests would require a capital spend of around £100m but could ultimately deliver £20m or more a year to profits, by Batram's calculations. "With over £200m of financing headroom, this would be easily affordable," Batram believes.Meanwhile, the company has two large stakeholders lurking on its registry: Genting, owner of Stanley Casinos, with 11% and investment group Hong Leong with 29%. "If either of these groups is considering a bid, the catalyst could be further positive progress at Mecca and this may not be long in coming," Batram believes.The broker has raised its target price to 140p from 134p, based on a model that assumes no expanded roll-out of Full House or new casino licence wins. "An accelerated roll-out could add a further £100m of value, £25m of EBITDA ]earnings before interest, tax, depreciation and amortisation ], or 26p per share, and would lead to a significant upgrade to forecasts," Batram maintains."Not only would delivery of the full organic opportunity enhance the bottom line; it could transform the market's perception of Rank, leading to an upward re-rating. A free cash flow yield of more than 10% is also attractive," the broker concludes.Peel Hunt rates the shares as a "buy".