Endeavour Group: Swings and roundabouts

About the author:

Author name:

By Alex Lu

Job title:

Analyst

Date posted:

24 August 2022, 8:00 AM

Sectors Covered:

Industrials

• Endeavour Group's (ASX:EDV) FY22 result was slightly above our expectations but in line with Bloomberg consensus.
• FY23 guidance results in modest downgrades to forecast, although little change to target price. Of most interest is the expected time to US launch of the CORIS® which will now take the de Novo path and in our view likely take a couple of years.
• The share price has reached our target and we move to a Hold (from Add) recommendation.

FY22 result was slightly above our forecast but in line with consensus

Key positive(s): Hotels earnings were well above expectations (+19% vs MorgansF) with strong margin improvement (EBIT margin +240bp).

Key negative(s): 2H22 Retail EBIT was weak (-18%) mainly due to higher supply chain, labour and technology costs and increased promotional activity; Operating cash flow was down 15%; VIC gaming tax changes and amortisation of gaming machine entitlements is estimated to negatively impact Hotels EBIT by ~$20m pa.

Our FY23-25F group EBIT forecasts remain broadly unchanged with downgrades to Retail EBIT of 14% offset by upgrades to Hotels EBIT of 25-26%. Our target price remains unchanged at $7.30 and we maintain our Hold rating.

Hotels was the key highlight

Despite a tough 1H22 on the back of extensive COVID-related restrictions, Hotels FY22 EBIT rose 21% to $315m (+19% vs MorgansF). Trading recovered strongly in 2H22 as restrictions eased and sales rebounded, with EBIT margin (FY22 +240bps to 20.8%) benefitting from higher sales leverage and good cost management.

EDV acquired five hotels during FY22 with management flagging further potential deals in the year ahead.

Retail FY22 EBIT was flat at $666m, which was 5% below our forecast. 2H22 EBIT was particularly weak (-18%) despite sales being down only 1%, mainly due to higher supply chain and technology costs, labour shortages and increased promotional activity.

Elevated costs are expected to continue in 1H23. FY22 online sales increased 17% to $1.0bn and now represents 10.0% of Retail sales (FY21: 8.4%).

Outlook

For the first 7 weeks of FY23, EDV said it was seeing continued recovery in Hotels and Retail trading patterns are returning to normal. Retail sales were up 12.7% vs the same period in FY20 (pre-COVID) and Hotels sales were 13.4% higher.

Against the same period in FY22, Retails sales were down 6.7% and Hotels sales were up 75.2%. EDV expects the retail drinks and hospitality markets will continue to return to normal over the course of FY23.

Changes to earnings forecasts

At a group level, our FY23-25F group EBIT forecasts remain broadly unchanged.

However, at a divisional level, we reduce Retail EBIT by 14% while Hotels EBIT rises by between 25-26%. These changes largely offset each other.

Investment view

EDV is a relatively defensive business with well-known brands and strong market positions in both the retail liquor and hospitality industries. Long term growth opportunities include expanding the network footprint, leveraging digital and data, growing the product range, acquisitions, and improving operating efficiency. 

Despite our positive long-term view on EDV, trading on 24.4x FY23F PE and 3.0% yield we continue to see the valuation as full and retain our Hold rating.

Our PE-based target price remains unchanged at (login to view).

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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