Coles Group: Hotels offloaded

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Alex Lu
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By Alex Lu
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Date posted:
06 March 2019, 2:14 PM
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Spirit Hotels sold for A$200m

Coles Group (COL) has entered into a 50/50 joint venture with Australian Venue Co. (AVC, majority owned by KKR) in relation to its hotels business, Spirit Hotels. Under the JV, AVC will manage and receive earnings from Spirit Hotels (comprising 87 hotels with 76 in Queensland, 7 in South Australia and 4 in Western Australia) while COL will manage and receive earnings from the 253 retail liquor stores (comprising 243 stores in Queensland and 10 in South Australia & Western Australia). As part of the deal, AVC will pay Coles approximately A$200m. The net impact on COL's annual earnings will be a reduction in revenue of approximately A$300m and EBIT of approximately A$13m.

Subject to satisfying conditions precedent (including obtaining consent from several landlords), the deal is expected to close by June this year.

A deal that satisfies all parties

Liquor laws in Queensland state that to obtain a liquor licence for a retail liquor shop, the owner must already hold a commercial hotel licence for a hotel within 10km. This has made it difficult for COL to operate retail liquor shops (which complement the supermarkets business) without also having to operate hotels. Given Spirit Hotels generates a proportion of revenue from gambling activities, management (both COL and previously Wesfarmers) have previously expressed their desire to exit the business with these activities considered to be non-core. 

COL said that relevant liquor and gaming authorities in Queensland, South Australia and Western Australia have been engaged and indicated that they have no objections to the structure.

Tangible and intangible benefits

We calculate the sale of Spirit Hotels was executed at approximately 15x FY19F EV/EBIT, which in our view was a good outcome. Financial metrics aside, and given its relatively small contribution to COL's total group earnings (approx. 1% of EBIT), we believe the exit of the business has greater intangible benefits from an ethical perspective. 

On the back of this deal we also expect Woolworths (WOW) to look at executing a similar transaction for its ALH joint venture.

Investment view

Given the deal is subject to a number of conditions, we make no changes to earnings forecast. COL is currently trading on 17.4x FY20F PE and 4.8% yield. While metrics are undemanding, the operating environment remains tough with COL facing a number of headwinds including share loss in NSW and higher labour and energy costs. Competition remains intense, and until we see evidence of a sustained improvement our share price target remains unchanged.

We retain our Hold recommendation.

More information

Morgans clients can access our detailed report and revised share price target for Coles Group (COL). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

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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