Drawing on its cricket puns, Shore Capital has identified three leisure stocks that could hit a century in the near future.
All can “Raise the bat’”, the broker suggests, “be it £100 million of operating profit (Rank and C&C) or 100p of EPS (Entain)”.
After a series of missteps by the trio in recent years, ShoreCap believes it won’t take much for each to rerate materially.
At Rank Group PLC (LSE:RNK) lower casino visitor numbers, elevated cost pressures and disappointing digital trading saw operating profit fall to just £18 million in 2023.
C&C Group PLC (LSE:CCR) mistakes include a botched ERP implementation compounded by a challenging hospitality market and cost pressures resulting in operating profits of €60m last year.
“A charge sheet as long as your arm has resulted in our Entain EPS forecasts falling below 30p this year.”
To get to ‘100’, ShoreCap sees achievable catalysts for all three.
“For Entain PLC (LSE:ENT) the return to market level growth rates and 28% margins in Digital could add 40p per share over the medium-term, along with the unwind of BetMGM losses (15p) and eventual $500m EBITDA (40p), along with lower interest charges (5-10p).”
At Rank, “A recovery in weekly revenues to £7 million at Grosvenor venues and doubling Digital profitability (consistent with last November’s CMD) could improve operating profit to £80m (FY24A: £46m), with the proposed measures as part of expected wider gambling reform potentially a further net £20m”.
C&C boosts are the unwind of the ERP challenges in GB Distribution and improving margins at Branded Drinks, including growing the mix of higher margin premium beer & cider and potentially addressing Magner’s underperformance.
Shorecap added that updates from all three have shown progress on these fronts.
Rank reported a partial recovery in profitability last year, with further momentum into the new financial year and Digital targets upgraded.
Entain's online revenues turned positive in its second quarter, with the UK following suit in the current three months and ahead of schedule, whilst first-half profitability rebounded strongly at C&C.
Share prices currently do scant justice to cash flow (C&C) and the opportunity to transform the UK casino market (Rank), with both stocks potentially worth comfortably over 200p per share on delivery.
“Given the long-term structural opportunities (notably the US) and peer comparisons, £20 could be a target to shoot for at Entain (10x EBITDA) on delivery of the earnings progression set out.
“What is clear is that it won't take much good news to rerate all three of these stocks.”