Endeavour Group: Going cashless?

About the author:

Author name:

By Alex Lu

Job title:

Analyst

Date posted:

23 January 2023, 7:00 AM

Sectors Covered:

Industrials

• Endeavour Group's (ASX:EDV) share price has fallen 22% since the FY22 result on 23 August.
• We believe this is due to: 1) lofty expectations from the strong share price performance leading up to the FY22 result; 2) a softer outlook for the Retail division as trading patterns normalise post COVID; 3) increased regulatory risk related to the potential introduction of a cashless gaming system in NSW and TAS that could affect Hotels’ gaming revenue; and 4) wetter and colder than normal weather on the east coast that could impact drinks consumption in 2Q23.
• The potential introduction of a cashless gaming system in NSW and TAS is a key risk. However, using conservative assumptions, we estimate the downside impact on EDV’s group EBIT to be no more than 5%. Nonetheless, we think the uncertain regulatory environment is likely to weigh on sentiment in the stock in the short term.
• We adjust FY23/24/25F EBIT by -1%/-1%/-1%. Our target price decreases to (login to view) to reflect the change in earnings forecasts and the increased uncertainty in the medium-term growth outlook. Hold rating retained.

EDV’s share price has been under pressure over the past few months

EDV’s share price has fallen 22% since the FY22 result on 23 August. Over the same period, the S&P/ASX200 index is up 6%.

We think EDV’s share price underperformance against the index is due to several factors, with a key focus from investors being the potential introduction of a cashless gaming system in NSW and TAS and the impact this could have on EDV’s Hotels earnings.

From what we understand, VIC and QLD (where EDV has the greatest exposure, combining for ~63% of the total hotels in the portfolio) are not looking to make changes to the current gaming framework.

The impact from cashless gaming systems is unknown

Despite suggestions that the introduction of a cashless gaming system could reduce gaming expenditure, a report by the Victorian Responsible Gambling Foundation in December 2021 found that cashless payment methods could see an increase in expenditure.

The report reviewed literature covering gambling research, consumer behaviour and cognitive psychology to examine the possible effects of cashless gaming from a gambling harm-minimisation perspective.

A key finding was that cashless payment methods are generally associated with increased expenditure with less ‘pain of payment’ when compared to cash, suggesting cash is better for expenditure regulation.

Earnings impact is likely to be relatively small

Despite the financial impact and details of if/when/how a cashless gaming system will be implemented in NSW being unknown, we attempt to quantify how this could affect EDV’s earnings. We believe the impact from a regulatory change in TAS is likely to be immaterial given only ~1% of EDV’s hotels are in TAS. 

Using conservative assumptions, we estimate gaming in NSW represents ~10% of EDV’s group EBIT. Hence, even if the introduction of a cashless gaming system in NSW leads to a 50% decrease in gaming earnings in that state, the result will be a ~5% drop in group EBIT.

Changes to earnings forecasts

We adjust FY23/24/25F EBIT by -1%/-1%/-1%.

For 1H23, we forecast underlying EBIT to increase by 9% to $604m driven by a rebound in Hotels earnings, partly offset by a decline in Retail.

Investment view

EDV is currently trading on 21.9x FY23F PE and 3.3% yield. While the stock is starting to look more attractive following the recent pullback in the share price, we think the uncertain regulatory environment is likely to weigh on sentiment in the short term, despite the risk to group earnings being relatively modest.

Elevated costs related to supply chain, labour and technology are expected to persist in 1H23 and with promotional activity remaining high, we prefer to wait for more clarity on operating conditions when EDV reports its 1H23 result on 13 February.

Hold rating maintained.

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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.