Gambling business

As a quick reminder, Rank is a gambling business based in the UK. Some of its most prominent and best known brands include Mecca Bingo and Grosvenor Casinos.

So what’s happening with Rank Group shares currently? Well, as I write, they’re trading for 91p. At this time last year, the shares were trading for 162p, which is a 43% decline over a 12-month period. The shares took a bit of a hit in June when the business issued a profit warning, but more on that later.

To buy or not to buy Rank Group shares

So what are the pros and cons of me buying Rank Group shares currently?

FOR: Despite a profit warning for the year ended 30 June, analysts are optimistic for Rank Group’s future prospects. I do understand that forecasts may not always come to fruition, however. They predict earnings could surge as high as a triple-digit percentage, and potentially offer a dividend yield close to 5%.

AGAINST: On 20 June, Rank Group announced that it is expecting close to £40m of profit for the year ending 30 June, despite initially reporting it could be between £47m-£55m. Rank Group shares slumped to 79p, but have recovered 15% to current levels. It pointed towards cost pressures but primarily a lack of footfall from international customers and tourists who regularly frequented its London locations, especially prior to the pandemic, that have failed to return. Profit warnings are rarely a good omen for me when reviewing investment viability.

FOR: At current levels, Rank Group shares look decent value for money on a price-to-earnings ratio of just 11. Furthermore, despite a profit warning, at least the company is not in the red and is turning over a profit. Buying now at dirt-cheap levels with a view to longer-term recovery could be a shrewd move for my portfolio.

AGAINST: Macroeconomic headwinds such as soaring inflation and cost pressures have plagued many businesses in the UK. Rank Group is no different. Rising costs put pressure on profit margins. In fact, this is one of the points raised in its profit warning in the update in June. With no end in sight, these cost pressures may continue for the foreseeable future, affecting investor sentiment and returns.

My verdict

Reviewing the positives and negatives, I’ve decided I would not buy Rank Group shares for my holdings. Another factor putting me off is the rise of online gambling in line with the adoption of technology in recent years. Many traditional bingo halls and casino locations have suffered and I believe this trend may continue.

Rank Group shares are tempting, especially at current levels. I do believe they can recover and Rank will continue to be profitable in the future, however. I would rather spend my hard-earned cash on better quality stocks with prospects of profit growth that can offer consistent returns in the longer term.

June’s profit warning

On 20 June, the company issued a trading update with a profit warning for the trading year ended on 30 June 2022. The firm expected “softer” performance in its third and fourth quarters from its UK venues. The directors said there had been some improvement after April. But takings were “considerably weaker than expected”.

Rank’s business suffered a lot during the pandemic. And it seems things are taking a long time to get back to normal. Higher-spending overseas customers have been slow to return to the firm’s London casinos. And there’s been “continued softness” in visitor numbers right across the company’s venues.

On top of that, Rank saw a lower-than-average casino win margin in the fourth quarter and cost pressures from inflation. And the bottom line is that the directors estimated operating profit would come in around £40m for the year. Previously they’d predicted a range of between £47m and £55m. So, expectations and the share price took a bit of a wallop. 

Creeping back up

A year ago, the share price stood near 168p and today it’s about 89p. However, it’s been edging a bit higher again since the profit warning. So, could today’s level be a bargain price? Maybe. After all, recovery from the pandemic is ongoing and trading could improve from where it is now. I think the creep higher since June shows that other investors are looking beyond recent trading woes.

City analysts are certainly optimistic. They’ve pencilled in a triple-digit percentage surge in earnings for the current trading year to June 2023. And based on that forecast, the forward-looking earnings multiple is just below seven. Meanwhile, the price-to-book value is around one and the anticipated dividend yield is running at 4.7%. 

That’s a tasty set of value credentials. But it’s always possible for Rank to miss its estimates. Perhaps further operational problems will affect the company. Nevertheless, it often takes recent negative news to create value conditions such as Rank’s now.

Cheap isn’t risk-free

However, even a low valuation is no guarantee of a successful investment outcome for me. All shares carry risks as well as positive potential — even cheap-looking ones.

The company has struggled to grow its earnings since 2018. But I’m optimistic the business could see better times ahead. And the stock tempts me now. I’d be inclined to buy a few of the shares and hold them for at least five years as underlying progress in the business unfolds. 

But it’s not the only consumer-facing stock that’s caught my gaze. I also like the look of retailers Next and JD Sports Fashion.

Could this threat be baked into Trifast’s current valuation, however? I think it could. At current prices of 140p, the bolt-builder trades on a forward price-to-earnings growth (PEG) ratio of 0.2. This leaves a wide margin of error for earnings projections to miss, in my opinion (City analysts currently expect profits here to rocket 81% in the fiscal year to March 2022).

As a long-term investor I like Trifast a lot. Revenues might suffer in the near term if car manufacturing issues continue. But I think its sales outlook for this decade is pretty bright as demand for zero emissions vehicles booms. I also like the company’s exposure to other fast-growing end markets like energy, medical, and infrastructure.

A high-risk penny stock I’m looking at

Bingo hall operator Rank Group (LSE: RNK), which also trades at 140p, is a share that’s not the faint of heart. The gambling giant suffered a shocker in 2020 and early 2021 as the Covid-19 crisis forced the closure of its estate. The invasion of the omicron variant on these shores raises the spectre of fresh lockdowns in the weeks and months ahead, too.

It’s high risk, therefore, but I also think this almost penny stock could ultimately prove high reward. So it’s my opinion that the recent share price weakness could provide an attractive dip buying opportunity for my portfolio. The popularity of bingo in Britain has boomed in recent times and is expected to continue growing. This bodes well for Rank, which operates Mecca bingo halls along with the brand’s online portal.

I also like Rank’s exposure to the fast-growing online casino market under its Grosvenor masthead. Net gaming revenues here ballooned 12% during the three months to September.

Market day

Property listings specialist OnTheMarket (LSE: OTMP) trades barely above the penny stock limit, at 102p per share. It has ducked back towards its former territory as concerns over omicron have risen. Signs that home sales are falling sharply hasn’t exactly helped confidence in the company, either. Home sales dropped by more than half between September and October, according to HMRC.

The possibility that housing demand will continue to sink in 2022 due to economic uncertainty and the reinstatement of full-fat stamp duty is possible. It’s my opinion, however, that homebuyer interest — and consequently traffic at OnTheMarket — will remain strong as low interest rates and intense competition among lenders will remain in play. Significant government help for first-time buyers should also keep business ticking along nicely.

OnTheMarket is looking to capitalise on this opportunity by improving its website and its brand over the next 12 months, too. Like Trifast and Rank, I think this cheap UK share could help me make a lot of money.

I think all of the three companies outlined below have significant growth potential, which is why I would buy them for my portfolio today. 

Growth potential

The first company on my list is the engineering business Weir (LSE: WEIR). The group produces engineering equipment for the mining and oil and gas sectors, and it is currently benefiting from an increase in commodity prices. As prices rise, miners have more cash to spend on new and existing projects. This means more orders for Weir. 

According to its interim results for the six months to the end of June, orders during the period increased 17% and adjusted operating profit jumped 12%. 

I think commodity prices will continue to boom as demand for critical resources expands. Governments are spending significant sums on infrastructure projects worldwide, and the resources for these projects will need to come from somewhere. Weir may continue to benefit as miners grow to meet this demand. 

That is the main reason why I would buy this stock for my portfolio of UK shares. However, I should note that the commodities industry is incredibly volatile. If prices slump, producers could slash orders. That would be terrible news for Weir. 

Recovery play 

In my opinion, casino operator Rank Group (LSE: RNK) is an attractive pandemic recovery play. During the pandemic, the firm’s casinos were forced to close. The company survived by boosting the size of its online business, which provided much-needed cash flow for the organisation. 

Thanks to its online business, the group was in a solid position to stage a recovery as the economy reopened. And since that reopening, in the 13 weeks to 15 August, sales have rebounded. During the period, they were just 19% below the same period in 2019. With average weekly revenues of £5.7m, the firm is comfortably above its cash break-even level of £4.4m. 

I think these figures imply the company is set for a strong recovery in the weeks and months ahead. That is why I would buy the stock for my portfolio of UK growth shares. 

Issues that may destabilise the group’s growth include the risk of another lockdown, and additional regulations, which may increase costs and reduce customer spending. 

Basket of UK shares 

The final company I would buy as a growth investment is Virgin Money UK (LSE: VMUK). 

I think this challenger bank has tremendous potential. Its growth slowed last year, mainly due to the pandemic, but management is targeting expansion this year. The company is trying to grow in personal lending and mortgages, and it is targeting higher interest loans to improve profit margins. 

It is also investing heavily in its digital capability, and this is already yielding results. Over 100k customers have signed up for online products, and it is working with other fintech companies to improve the offering for consumers. 

As the bank pushes ahead with its growth plans, I would buy the stock for my portfolio of UK shares. 

However, this equity might not be suitable for all investors. Banks can be challenging to understand, and if there is a sudden economic downturn, this sector is usually the first to feel the pain. 

Airline easyJet (LSE: EZJ) and bingo halls and casinos owner Rank Group (LSE: RNK) were both floored by pandemic lockdowns and restrictions. Their share prices are still languishing far below their pre-pandemic levels.

But I think they’re fundamentally sound businesses. And I reckon their discount prices make them great stocks for me to buy in August.

Low flyer

In easyJet’s last pre-pandemic trading year (to 30 September 2019), it made an underlying profit of £349m. In the weeks between a trading update on 21 January 2020 and the pandemic crash, the stock traded within a market-capitalisation range of between £5.51bn and £6.16bn. Put another way, between 15.8 and 17.7 times the profit.

Today, easyJet’s market capitalisation is just £3.88bn, or 11.1 times the profit of the last normal year’s trading. If the company were to get back to its pre-pandemic profit and the stock were to regain its pre-pandemic valuation, the upside would be between 42% and 59%. In terms of the share price, that’s between about £12 and £13.50, compared with the current £8.50.

Risks to a positive outcome

Earlier this month — the day after ‘Freedom Day’ — easyJet published a trading update for the three months to 30 June. The first thing I’m looking at with businesses like this is whether I think they can get through to a return to normality without going bust.

Virus variants and renewed restrictions or lockdowns remain risks. As such, I have to accept there are potential downside scenarios that could be damaging for my investment. Having said that, the company ended the period with access to £2.9bn of liquidity. With this headroom, I’m more than hopeful of a positive outcome. As such, this discount FTSE 250 stock looks very buyable for me.

Low rank

The calendar year of 2019 was Rank’s last 12 months of normal trading. It made an underlying profit of £77m. Between its half-year results on 30 January 2020 and the pandemic crash, the stock traded within a market-capitalisation range of between £1.11bn and £1.27bn. Or between 14.4 and 16.5 times the profit.

Rank’s market capitalisation is currently just £0.79bn, or 10.3 times the profit of the last normal 12 months’ trading. If the company were to get back to its pre-pandemic profit and the stock were to regain its pre-pandemic valuation, the upside would be between 41% and 61%. In terms of the share price, between 237p and 271p, compared with the current 168p.

Risks but additional liquidity

As with easyJet, I have to accept there are downside scenarios that could adversely affect an investment in Rank. Again, the risks of virus variants and renewed restrictions or lockdowns feature prominently.

However, Rank has made two announcements this month that are positive for its liquidity. First, it’s agreed an additional £25m credit facility. Second, it’s won a favourable ruling on an £80m VAT refund claim. Industry watchers believe HMRC is unlikely to appeal. As such, this is another FTSE 250 stock I’d be happy to buy.

I believe buying a basket of these companies could be one of the best ways to gain exposure to the UK recovery. As such, here are two FTSE 250 stocks I’d buy today.

FTSE 250 growth champions

The first company on my list is Pets at Home (LSE: PETS). This is the largest retailer of pet products in the country. Figures show the number of pets across the country has ballooned since the beginning of the pandemic. And it looks as if consumers are more willing than ever to splash out on their furry friends. 

According to the company’s most recent results, revenues across the group increased 8% for the financial year ended 28 March. Underlying profits rose 6.1%, excluding a £40.4m charge. The business will be using this cash to fund the expansion of its vet practices across the country. 

Unlike many other companies that have experienced a pandemic boost, I think it’s unlikely this will be a flash in the pan for the FTSE 250 stock. Pet ownership isn’t usually something that lasts for a couple of months. Many pets, of course, can live for years, suggesting the company has access to a whole new range of customers that’ll be returning for years. 

As management looks to build on this growth, I’d buy the FTSE 250 company for my portfolio right now. That said, retail is an incredibly competitive industry, and Pets will likely face competition from online retailers and other high street peers in the future. If the company ignores this challenge, it could lose customers. 

Recovery play

While I’d buy Pets as a growth play, I’d also acquire fellow FTSE 250 casino operator Rank (LSE: RNK) for my portfolio. Rank’s physical casinos have been closed for much of the pandemic. Luckily, the company’s online business has provided much-needed cash flow during this period. 

Now the country’s fully open again, management can start to rebuild the group’s shattered operations. According to a trading update published at the beginning of July, even before reopening, the firm’s venues were trading “above cash breakeven.” In the company’s Grosvenor casinos outside London, gaming revenue had already returned to 2019 levels. 

However, I’m aware this stock may not be suitable for all investors. Gambling is a highly regulated industry. As such, there’s always going to be a risk that companies like Rank could have their licences revoked. If they fall foul of regulations or licensing laws, authorities are usually quick to act. 

Still, based on the above update, I’m confident we will see a further improvement in the company’s trading during the second half of the year. That’s the reason why I’d buy the FTSE 250 stock right now. 

UK shares to buy

The first company I’d buy is recovery play Rank Group (LSE: RNK). Like most hospitality businesses, the casino operator has been winded by the pandemic. Thankfully, the group’s online business has provided some much-needed cash flow.

According to its latest trading update, like-for-like net gaming revenue was down 76% on the prior year for the quarter ended 31 March. Revenue from its gaming venues fell 98%, while digital revenues were down just 3%.

However, over the next few months, Rank should be able to reopen its gaming venues. Based on reports emerging from the hospitality industry over the past few weeks, it seems consumers aren’t holding back their spending when venues reopen. 

This suggests to me the enterprise could experience a strong recovery over the next few weeks and months. That’s why I’d buy this company for my basket of UK shares. 

Of course, Rank might not be suitable for all investors. Its primary business is gambling, which is highly regulated. Some investors might not be comfortable owning shares in a gambling enterprise. That’s understandable. The company faces some significant risks and challenges operating in this sector.

Still, despite these risks, I’d acquire the stock today. 

Flying high 

I’d also acquire Wizz Air (LSE: WIZZ) for my basket of UK shares. This airline entered the crisis in a relatively stable position. It had a strong balance sheet and was recording record growth in passenger numbers and profitability.

As such, while the company expects to report a full-year net loss of between €570m to €590m, at the end of the year the group had cash and equivalents on its balance sheet of €1.6bn. Therefore, this funding should provide the group with enough financial firepower to drive its recovery.

Indeed, many other airlines don’t have access to the same level of financial resources. That puts Wizz in a unique position to take market share and capture business from struggling competitors. 

That said, the airline industry is incredibly competitive. So, just because Wizz has a strong balance sheet today doesn’t necessarily mean the company will be able to grab market share and survive a price war. Especially when many of its competitors have been bailed out by national governments. 

This is probably the most significant challenge the company faces right now. However, I’d buy the stock for my portfolio of shares because I believe Wizz has what it takes to continue to navigate the competitive airline industry successfully.

As the sector starts to recover, I think it’s one of the few airlines worth buying. 

I much prefer them to the more indebted Marston’s, which has recently seen a bidder walk away from a takeover. 

Why Wetherspoons’ shares could recover

The pub group, founded and still run by vocal Brexiteer Tim Martin, has been able to raise money from shareholders on several occasions. This has helped it through the pandemic to date. The most recent raising was for £93.7m. Last year, it raised £141m.

The latest cash will help strengthen the balance sheet. Bullishly, the group has also said it wants to buy attractively-priced properties. Management thinks this will help it emerge stronger from the pandemic. 

On the downside, the pandemic has pushed up debts, net debt including bank borrowings and finance leases was £836m in April 2020. In the latest annual report, the company also said the year-end net-debt-to-EBITDA ratio was 9.48 times, compared to 3.36 times in 2019.

But it does have cash available and I expect the profit and loss to look much stronger once sales lift again.

Experienced management team

I think another thing going for the business is that the managers are very experienced and have seen plenty of ups and downs in the economy. Tim Martin has been chairman since 1983. His CEO John Hutson has been on the board since 1996, and his finance director since 2014. This strikes me as a positive sign that the management team is committed, know their industry and work well together.

They probably think longer term, especially with the founder still at the helm and being the largest shareholder in the group. 

My best guess is that once the pandemic subsides and we learn to live with it, Wetherspoons will return to being a profitable, cash generative business, although there’s no guarantee that social life will go back to what it was. The firm is currently a much more indebted business than I would like too, but this is beyond its control. Also, if Martin sells down his holding in the group in the future that could spook investors and push down the share price. So there are a few issues facing the pub group. 

Another share that could bounce back

Rank Group (LSE: RNK) the owner of Mecca bingo and Grosvenor Casinos is another leisure business that has felt the impact of lockdowns. The pandemic has not been kind to the share price, which had been rising before the stock market tumbled in March 2020.

The group operates in the UK and Spain and so the vaccine rollout in the former may help the shares in the not-too-distant future. Especially if vulnerable groups can return to bingo halls.

The group also has proprietary technology, which I think is currently not something most investors are aware of. It has a commercial partnership with Bauer to use the platform. Growth in this area could possibly boost the shares in the future. But I’ll also be keeping an eye out for increased debt as a result of sites being closed, as this may drag on returns for years to come. 

Today, I’m looking at three stocks that have risen by at least 60% over the last four weeks. I think all three businesses will be survivors, but there’s only one of these shares I’d buy today. Read on to find out why…

Recovery could be slow

I think that demand for package holidays will probably bounce back quickly from next summer. But I think FTSE 100 holiday operator TUI (LSE: TUI) could take longer to recover.

TUI’s operations are far-reaching and complex. According to the firm’s website, it owns 150 aircraft, over 400 hotels and 17 cruise ships. It operates in 180 regions. It’s hard to imagine how the firm has handled the disruption caused by the coronavirus pandemic.

However, one thing we do know is that TUI has taken on around €4bn of new debt in order to survive this year. When business returns to normal, this debt will still need to be paid back. I think this is likely to put pressure on shareholder returns for several years.

I can also see some risk that TUI will raise cash to repay debt by issuing new shares, diluting existing shareholders.

However I look at it, TUI shares look expensive enough to me at the moment. I’m not buying.

This UK share could suffer delays

Trainline (LSE: TRN) is well known for its online rail booking service. In 2019/20, this business generated sales of £261m, 24% higher than in 2018/19. Trainline’s results for the current year have obviously suffered. But, in theory, I’d expect this business to bounce back quickly and be highly profitable.

Unfortunately, that’s not the case. Trainline reported an £81m loss last year and a £14m loss the previous year. Despite its high-tech credentials, this business doesn’t seem to be very profitable.

I guess things may improve if the business returns to growth and continues its international expansion. But Trainline’s operating model in the UK could be affected by regulatory changes to simplify ticket pricing.

City analysts reckon the company will generate a £20m profit in 2021/22. They’re forecasting earnings of 3.2p per share for next year, which values the stock at a whopping 146 times forecast earnings. That’s much too rich for me, so this is another recent winner I won’t be buying.

The UK leisure share I’d buy

Bingo halls and high street casinos may seem out of place in the pandemic world. But when Rank Group (LSE: RNK) reopened its Mecca bingo halls in August, revenue bounced back to 70% of last year’s levels within a month. The firm reported similar performances from at its Grosvenor casinos.

Rank has an online business too, and it’s investing in growth in this area. This means the company isn’t completely dependent on physical venues. Although the current lockdown will be hitting the firm’s finances hard, Rank has already raised £70m through a share issue. Its financial situation looks fairly secure to me, assuming businesses are able to stay open next year.

At around 150p, Rank shares trade on about seven times 2021/22 forecasts, with a potential dividend yield of 3.3%. I think this could be an attractive entry point for a long-term investment. I’d be happy to buy this UK share for my portfolio, despite the stock’s recent gains.

One company I don’t see much room for a recovery from is the indebted cinema chain Cineworld (LSE: CINE).

The stock market crash can’t even tempt me

Cineworld wasn’t doing well pre-covid. The pandemic, especially if it goes on much longer, could see the share price fall further. That’s despite it falling already for most of the past 18 months.

The big problem the chain faces is debt. Management sought to scale up the business pre-pandemic by making huge acquisitions. Any experienced investor will tell you though that leverage will work against you in bad times. Unfortunately just as the balance sheet is creaking under debt, we’ve hit tough times, especially for non-essential businesses like cinemas.

All hope for the share price now seems to rest in a takeover by a Chinese tycoon who has built up a stake approaching 10% as the shares have fallen. I think shareholders will be very lucky to make any money even if the company is taken over.

It doesn’t seem realistic to think a premium will be paid for the shares when the industry, and the company specifically, face so many problems. For me, Cineworld is a share to avoid. That’s even after the stock market crash has made the shares look very cheap.

One share that could have a swift recovery

Rank (LSE: RNK) has also been hit hard by covid because its bingo halls are typically frequented by older customers who are more vulnerable to the virus. Unlike Cineworld however, its shares were doing quite well pre-pandemic.

The group’s share price was performing well pre-covid because Rank management had lifted profit expectations. The transformation programme was going well and digital revenues were rising. Fortunately, the latter are still doing fairly well in this environment. 

Its online operations may well help it through this difficult period when bingo halls and casinos are understandably struggling. Indeed digital net gaming revenue rose 23%. A lot of savings have been found to cope with the impact of less customer visiting premises.

Longer term a focus on digital, which the pandemic necessitates, may help the business grow its online revenues even quicker. This would be a real upside for investors, as digital businesses tend to be more popular and higher rated by the market.

In a better environment post covid will customers return to bingo halls and casinos? I think yes. This is why the stock market crash may have created an opportunity for investors.