Australia | Oct 31 2023
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Endeavour Group saw the cost of living biting in the September quarter, as consumers trade down to cheaper liquor alternatives and eschew the pokies.
-Endeavour sales soft in the September quarter
-Consumers trade down in liquor
-Gaming revenues slowing
-Brokers for the most part see defensive value
By Greg Peel
In its core liquor retailing segment (bottle shops), Endeavour commands around half of the addressable market, and Endeavour’s liquor sales are much more profitable than those of nearest competitor Coles Group ((COL)), notes Ord Minnett (Morningstar).
In its hotels segment, Endeavour leads in number of venues and electronic gaming machines, ie pokies.
Demand for both liquor and gaming is relatively insensitive to price or economic cycles, says Morningstar.
Yesterday, Endeavour provided a September quarter sales update, which was softer than expected.
Total sales rose by 2.1% in the September quarter, lower than most forecasts and tracking below first half FY24 consensus of 3.1%. Retail sales rose 1.9% and Hotels 2.8%. Retail slowed across the quarter from 2.5% growth in the first six weeks and 1.5% in the second eight weeks.
Slower than expected bottle shop sales reflect the cost of living crisis. While consumers will still buy alcohol whatever the economic conditions, Endeavour noted they were trading down last quarter to cheaper alternatives: mainstream beer instead of craft beer; rose instead of whites and reds, and pre-mixed drinks instead of full bottles of spirits.
Coles noted the same trend in its earlier trading update.
Consumers are also going to the bottle shop more frequently, but buying less when they do. This suggests more careful week-on-week budgeting from households. Consumers also had to cope with 5% annual price inflation, driven more by excise increases than management-driven increases.
This trend of trading down to “value” is also reflected in the group’s standout performer over the quarter – Dan Murphy’s – the discount warehouse for liquor. Dan outstripped BWS, although BWS still performed reasonably well.
Not performing well was liquor delivery service Jimmy Brings, another victim of belt-tightening.
Enough for Now
In Hotels, Endeavour saw good growth in food and accommodation on top of liquor sales, but this was offset by weak numbers for pokies. It seems pokies are not quite so insensitive to the economy after all.
While Endeavour has a pipeline of pubs it would be interested in acquiring, for now it won’t. Having acquired eleven in FY23, none were acquired in the September quarter. Management noted it can achieve a better return on investment in refurbishing and redeveloping the pubs it already owns, particularly recent acquisitions, than the return on adding more pubs in the near term.
Management was also pleased to reveal new government-mandated reduced hours for gaming machines in Victoria had a minimal impact on sales and was in line with expectations.
Board Room Shenanigans
Endeavour Group’s largest shareholder, billionaire pub owner Bruce Mathieson, had not been happy with the company’s performance. Mathieson wants chairman Peter Hearl to step down and for ex-Woolworths executive Bill Wavish to be installed as a director.
Mathieson has threatened to call an extraordinary general meeting of Hearl does not step down at today’s annual general meeting. However, the odds are against the move, as multiple proxy advisors have told investors not to vote for Wavish.
Brokers see such disruption as a risk, which could impact on sentiment towards the stock.
Macquarie hopes to see “an amicable resolution of the parties at the AGM and a renewed focus on the core operations of the group”.
For investors considering whether to buy/sell Endeavour Group, broker consensus is not particularly helpful. The five brokers monitored daily by FNArena are split down the middle, with two Buy or equivalent ratings, two Hold and one Sell.
Macquarie (Outperform) has long advised that in times of a cost of living crisis, consumer staples, such as supermarkets, and “staple discretionary”, such as liquor (although Endeavour is included in the ASX200 staples sector) are a better bet than cyclical pure discretionary.
“Overall,” says Macquarie, “physical store market share appears stable and consumer demand, although more value focused, appears intact”. The broker believes the outlook for the retail business remains sound over both the near and medium term.
Ord Minnett, via Morningstar, has an Accumulate rating, which is one step below Buy on the broker’s five-tier rating system. Even taking a wide margin of safety, Morningstar notes Endeavour trades at a significant discount to its own fair value calculation.
Despite interest rate hikes weighing on the appeal of defensive yield stocks, and uncertainty relating to revenue from gaming, Morningstar/Ord Minnett believes the downside is more than priced in.
A test may come when the RBA meets next week on Melbourne Cup Day, at which it is considered more likely than not to reignite rate hikes, and maybe in December as well. This puts Christmas retail sales under more pressure, a time when liquor buying spikes.
Morgan Stanley (Underweight) has arguably been the most downbeat about the prospect for the Australian consumer under relentless cost of living pressure. Yesterday’s update does not change the broker’s investment thesis.
One sticking point for Morgan Stanley has been that risk of tighter restrictions on gaming, such as those introduced in Victoria, will spread to other states.
Among brokers not monitored daily by FNArena, Goldman Sachs not only has a Buy rating but Endeavour Group is on the broker’s conviction list.
Goldman cites Dan Murphy’s and BWS gaining market share in the quarter, an attractive forward PE and an attractive forecast compound annual growth rate of earnings “for a staple with clear market-leading position”.
Jarden believes the market is pricing in a more negative scenario from gaming regulation and execution than justified, and that valuation is undemanding given opportunities with respect to capital structure and costs, and retains Overweight.
Among daily-monitored brokers, the consensus target price has fallen to $5.73 from $5.91 previously.
Jarden has lowered its target to $6.20 from $6.30. Goldman Sachs has retained a $6.40 target.
At the time of writing, the stock is trading at $5.01.
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