Endeavour Group: Getting back to normal
About the author:
- Author name:
- By Alex Lu
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- Date posted:
- 14 February 2023, 7:30 AM
- Sectors Covered:
- Endeavour Group’s (ASX:EDV) 1H23 result was comfortably ahead of expectations with Retail margin performance the key standout.
- Key positives: Both segments delivered earnings and margins ahead of our expectations; Group ROFE increased 80bp to 12.2%.
- Key negative(s): Operating cash flow fell 31% due mainly to higher inventory levels; ND/EBITDA (incl. leases) increased to 3.3x (1H22: 3.1x); Online sales fell 20%.
- Management said trading has stabilised across the group in the first five weeks of 2H23 with Retail sales flat (+0.2%) and Hotels sales up 31.5% on the pcp.
- We adjust FY23/24/25F EBIT by +7%/+6%/+5%.
- In our view, the result highlighted management’s ability to control costs despite inflationary pressures. While the regulatory environment remains uncertain, on balance, we think the risks lie to the upside with the underlying business performing well. Our target price increases to (login to view) and with a 12-month forecast TSR of 13%, we upgrade our rating to Add (from Hold).
Strong 1H23 result
EDV’s 1H23 result was ahead of expectations with EBIT up 16% to $644m (+7% vs MorgansF and +9% vs Visible Alpha consensus) and underlying NPAT rising 17% to $364m (+5% vs MorgansF and +8% vs Visible Alpha consensus).
The result reflected a strong rebound in Hotels (EBIT +112%) following lockdowns in NSW and VIC in the pcp, and a lower-than-expected fall in Retail earnings (EBIT -9%) as consumption shifted from at-home to on-premise as venues reopened.
Retail was the key standout
Retail EBIT fell 9% to $418m (+9% vs MorgansF) on the back of a 4% drop in sales (LFL sales -5.0%). While EBIT margin decreased 50bp to 7.7% due to the deleverage impact of lower sales and higher digital and technology costs, the decline was much better than our -100bp forecast.
This was due to the ongoing consumer trend towards premiumisation and new products, efficiency benefits from personalisation and promotional optimisation, and productivity initiatives such as activity-based rostering. The 20% drop in online sales as customers returned to shopping in stores was also incrementally beneficial to margins.
Hotels EBIT jumped 112% to $256m (+2% vs MorgansF) due to a return to socialising following severe restrictions in the pcp and the addition of five acquisitions. The result also benefitted from EDV’s bistro and bar renewal program, an improved accommodation offering, and investments in gaming rooms and machines with the average age of EGMs reducing to 6.6 years (1H22: 7.9 years).
In the first five weeks of 2H23, EDV has continued to see trading stabilise across the group.
Retail has seen a continuation of trends seen in 1H23 with stability and consistency in average weekly sales and basket size, while Hotels are now back to full operations.
Retail sales were in line (+0.2%) and Hotels sales were up 31.5% on last year, which was impacted by reduced patronage and labour shortages due to the Omicron outbreak (particularly in January 2022).
Changes to earnings estimates
We increase FY23-25F EBIT by between 5-7% and underlying NPAT by 3-5%.
Following an 11% decline in the share price over the past six months, EDV is currently trading on 21.4x FY24F PE (vs an average one-year forward PE of ~24x since listing in June 2021) and 3.4% yield.
While the regulatory environment remains uncertain, given where the stock is trading, we think the balance of risks is to the upside with EDV’s underlying business performing well.
Our PE-based target price increases to (login to view) following updates to earnings forecasts and a roll-forward of our model to FY24 forecasts. With a 12- month forecast TSR of 13%, we upgrade our rating to Add (from Hold).
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