Endeavour Group: Naturally hedged

About the author:

Alex Lu
Author name:
By Alex Lu
Job title:
Analyst
Date posted:
22 February 2022, 11:30 AM
Sectors Covered:
Industrials

  • Endeavour Group's (ASX:EDV) 1H22 result was well ahead of expectations.
  • Key positives: Both divisions performed much better than we expected; Group EBIT margin rose 30bp to 8.8% despite Hotels being significantly impacted by lockdowns and trading restrictions.
  • Key negatives: Omicron has caused increased uncertainty with sales for the first six weeks of 2H22 tracking slightly behind the pcp (Retail -2.0%, Hotels -2.9%).
  • We increase FY22F EBIT by 4% while FY23F and FY24F remains largely unchanged.
  • Our target price rises to (login to view) and we maintain our Hold rating. We continue to have a positive view on EDV longer term but see the current valuation (27.1x FY22F PE and 2.7% yield) as full with uncertainty to persist in the near term.

1H22 result was well above expectations

1H22 EBIT increased 3% to $556m (+16% vs MorgansF and +17% vs Visible Alpha consensus) and underlying NPAT jumped 16% to $311m (+23% vs MorgansF and +24% vs Visible Alpha consensus).

Earnings growth was achieved despite the Hotels business being particularly hard hit by extended lockdowns in NSW and VIC as well as the emergence of Omicron late in the period, with the Retail business providing a natural hedge as customers shifted from on-premise to off-premise consumption.

Both divisions performed much better than expected

Retail EBIT increased 10% to $461m (+12% vs MorgansF) despite a 1% decline in sales as the business cycled a very strong pcp (sales +19%).

EBIT margin growth of 80bp to an all-time high of 8.1% was a key highlight of the result reflecting improved product mix from higher margin new products and increased Pinnacle Drinks demand, lower promotional activity in the market, and good cost control.

EDV said competitor promotional activity began to increase in the lead up to Christmas and margins started to normalise as the business responded. Online sales increased 25% and now represents 10.7% of Retail sales (1H21: 8.5%).

Hotels EBIT fell only 1% to A$121m (+26% vs MorgansF) despite significant closures in NSW and VIC in 1Q22. There were only 30% of total trading days where all hotels were open in the half.

While EBIT margin fell 50bp to 17.8%, the result would have been weaker if not for solid gaming demand (typically higher margin) despite lower food and bar sales.

EDV acquired three hotels during 1H22 with two more purchased post balance date. Management noted that while M&A remains part of the growth strategy, due to the high prices of assets they will remain selective with organic investments often yielding better returns.

Outlook remains uncertain

EDV said sales across the first six weeks of 2H22 were tracking slightly behind the pcp, with Retail down 2.0% and Hotels falling 2.9%.

Staff availability has been a challenge in both businesses and consumer hesitancy reduced patronage in Hotels in January, although this has eased in February as restrictions were lifted.

Changes to earnings forecasts

We increase FY22F EBIT by 4% while FY23F and FY24F remains largely unchanged.

Lower net interest expense sees FY22 underlying NPAT rise by 9% while FY23F and FY24F both increase by 2%.

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 27.1x FY22F PE and 2.7% yield we see the valuation as full and 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: 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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