Endeavour Group: COVID making things difficult

About the author:

Alex Lu
Author name:
By Alex Lu
Job title:
Analyst
Date posted:
27 August 2021, 7:00 AM
Sectors Covered:
Industrials

  • Endeavour Group (ASX:EDV) FY21 result overall was above our expectations. Underlying NPAT however was slightly below Bloomberg consensus estimates.
  • Key positives: Earnings for both Retail and Hotels were above our expectations; Group EBIT margin rose 80bp to 7.8%; Cash conversion was strong at 117%; Retail online sales jumped 35%.
  • Key negatives: The outlook remains uncertain with Hotels in particular being impacted by COVID-related lockdowns; DPS of A7.0cps was lower than expected. For the first 8 weeks of FY22, group sales were 2.3% lower with Retail sales down 1.7% and Hotels sales down 7.3%.
  • We decrease FY22F group EBIT by 7% on the back of downgrades to Hotels earnings forecasts while FY23F and FY24F EBIT rises slightly (+2%). Our target price (login to view target price) and we maintain our Hold rating. We continue to have a positive view on EDV longer term but see the valuation (29.1x FY22F PE and 2.6% yield) as full given ongoing uncertainty in the short term.

FY21 result was better than we expected

FY21 EBIT grew 22% to A$899m (+5% vs MorgansF and +2% vs Bloomberg consensus) and underlying NPAT was A$445m (+1% vs MorgansF and -3% vs Bloomberg consensus).

Both Retail and Hotels performed well despite a disruptive and volatile year with Retail benefitting from elevated in-home consumption and Hotels bouncing back from heavy COVID restrictions in late FY20.

The balance sheet remains healthy with ND/EBITDA at 3.6x (or 0.9x ex-leases) leaving capacity for EDV to invest for further growth in areas such as digital, site upgrades, supply chain and expanding the Pinnacle offering.

EDV will also invest in its network of 339 hotels to enhance the customer experience (including bringing the average age of its gaming machines down from >9 years to 5-7 years) and remains on the lookout for further acquisitions.

Both divisions performed well

Retail EBIT rose 18% to A$669m (+2% vs MorgansF) on the back of 10% sales growth. All major drinks categories grew during the year with spirits particularly strong (+20%).

There was also an ongoing shift to premium products with strong growth in craft beer, Champagne and gin, as well as no-alcohol and low-alcohol alternatives. Online sales were up 35% and now represents 8.4% of total Retail sales (vs 6.9% in FY20).

Hotels EBIT jumped 49% to A$261m (+2% vs MorgansF) following a 50% decline in FY20. While FY21 remained challenging with ongoing COVID restrictions and associated costs, once restrictions were lifted the group experienced a strong rebound as customers returned to hotels.

Current restrictions however (particularly in NSW and VIC) have seen the business make a weak start to FY22 with several hotels closed for extended periods.

Outlook remains uncertain

Management advised that there remains considerable uncertainty and EDV’s FY22 performance will depend on further impacts from COVID. For the first 8 weeks of FY22, group sales were 2.3% lower with Retail sales down 1.7% and Hotels sales down 7.3%.

Changes to earnings forecasts and investment view

We decrease FY22F group EBIT by 7% to A$861m on the back of a 27% downgrade to Hotels earnings, partially offset by a 3% upgrade to Retail EBIT. At this stage our Hotels EBIT forecasts for FY23 and FY24 remain unchanged as we continue to expect conditions to normalise by then.

We note however that forecasting remains difficult and EDVs earnings growth trajectory over the medium-term will continue to depend on the impact of COVID.

Our PE-based target price (login to view target price) and we retain our Hold rating.

Risks

Key upside risks include stronger-than-expected sales growth, higher margins and value-accretive acquisitions. Key downside risks include adverse changes to liquor< and gaming regulations, government-imposed lockdowns, greater competition, and increased ESG consciousness from investors.

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Disclaimer: Analyst may own shares. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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