Woolworths: Moving some pieces around
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- By Alex Lu
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- Date posted:
- 04 July 2019, 11:18 AM
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- Woolworths (WOW) has announced its intention to combine Endeavour Drinks and ALH Group (to be called Endeavour Group) ahead of a possible demerger in CY20.
- The potential restructure and demerger will allow WOW to focus on its core Food business, while Endeavour Group will benefit from a more simplified structure.
- We value Endeavour Group at A$10.5-11.5bn with the potential transactions giving WOW the option of existing gambling activities entirely in the future.
- We make no changes to earnings forecasts but adjust the number of shares outstanding for the recent off-market buyback. Our PE-based target price rises (Morgans clients can login to view).
Endeavour Drinks and ALH Group restructure
Woolworths (WOW) has announced its intention to combine its drinks (Endeavour Drinks) and hospitality (ALH Group) businesses into a single entity (Endeavour Group).
Endeavour Drinks includes a range of retail brands such as Dan Murphy’s and BWS, while ALH Group comprises a portfolio of pubs, bars and hotels. Following the combination, WOW plans to either demerge the business or seek other value accretive alternatives.
The restructure is expected to occur during 2HCY19, while a subsequent demerger (or sale) is expected during CY20.
The combined Endeavour Group will be 85.4% owned by WOW and 14.6% owned by the Bruce Mathieson Group (BMG). Should the demerger proceed, WOW plans to retain a minority stake in Endeavour Group.
Focusing on Food
Assuming the transactions go ahead, the separation of Endeavour Group will allow WOW to increase its focus on the core Food business, which faces rising competition, higher costs and changing consumer preferences with digital becoming increasingly important.
The move will also allow Endeavour Group to pursue growth opportunities through acceleration of the store renewal program and new store openings. Management admitted that capital investment in Endeavour Group had been constrained due to the higher returns on offer in the Food business.
While WOW insists it is not trying to distance itself from the gambling industry, we think the separation of Endeavour Group will make it much easier for WOW to exit its gambling exposure entirely in the future.
We value Endeavour Group at A$10.5-11.5bn
As a standalone entity we value Endeavour Group on an enterprise value of between A$10.5-11.5bn, based on a 14-15x FY20F enterprise value (EV)/ earnings before interest and taxes (EBIT) multiple.
The valuation range represents a discount to the Australian Food business (16.5x) given its lower returns and is in line with Coles Group (COL) (14.9x) and WES (14.3x).
We note COL’s sale of its Spirit Hotels business was executed at ~15x EV/EBIT.
Maintain hold rating
We make no changes to earnings forecasts but adjust the number of shares outstanding for the recent off-market buyback.
Despite a strong balance sheet, good sales momentum and a higher returning business post a potential demerger of Endeavour Group, trading on 23.3x FY20F price earnings ratio (PE) and 3.2% yield we continue to see WOW as fully valued.
Morgans clients can login to view our detailed report and share price target for Woolowrths (WOW). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
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