Endeavour Group: Things are looking up for Hotels
About the author:
- Author name:
- By Alex Lu
- Job title:
- Date posted:
- 21 October 2021, 9:00 AM
- Sectors Covered:
- Endeavour Group' (ASX:EDV) 1Q22 sales trading update overall was broadly in line with our expectations.
- Total Retail sales fell -0.2% (vs Morgans -1.3%) while Hotels was down 9.9% (vs Morgans -8.5%).
- Management said the focus for 2Q22 will be the reopening of the Hotels business while remaining mindful of the ongoing impacts of COVID. While venues in NSW have seen a strong rebound in activity following the recent reopening, it was still very early days.
- We make negligible changes to FY22-25 earnings forecasts.
- Our target price increases to (login to view) on the back of the improved outlook for Hotels and lower risk of future lockdowns. While we retain our Hold rating, we believe EDV provides good leverage to a reopening of the NSW and VIC economies despite some likely moderation in at-home consumption going forward.
A decent 1Q22 trading update
Endeavour Group' (ASX:EDV) 1Q22 sales trading update was largely in line with our expectations.
Total group sales fell 1.2% with the Retail business benefitting from greater at-home consumption due to lockdowns in NSW and VIC but this was offset by closures to a significant part of the Hotels network.
Retail delivered a solid result
Retail 1Q22 LFL sales dropped 1.2% (total sales fell -0.2%), which was a solid result in our view given the cycling of 20.1% growth in the pcp. The performance reflected the shift to at-home consumption as well as the ongoing trend towards premium products. Compared to 1Q20 (pre-COVID), total sales were up 21.4%.
Encouragingly, sales in non-lockdown states and territories were up more than 17% over the same 2-year period, which we think should support demand as the NSW and VIC economies reopen.
Online remains popular with sales up 34% with penetration at a new high of 11.5% (vs 8.6% in the pcp). A portion of this growth was attributable to the shift to at-home consumption following on-premise closures, although online penetration also grew outside of NSW and VIC.
Hotels was negatively impacted by lockdowns
Hotels 1Q22 total sales fell 9.9% (vs -33.2% in the pcp), impacted by lockdowns in NSW and VIC with ~40% of the network closed during the quarter.
Snap lockdowns and COVID-related restrictions also limited trading in other states and territories.
Outlook improving but supply chain remains challenging
Management said the focus for 2Q22 will be the reopening of the Hotels business while remaining mindful of the ongoing impacts of COVID. While venues in NSW have seen a strong rebound in gaming, bar and food activity following the recent reopening, it was still very early days.
Labour availability remains challenging and supply chain constraints affecting both global and local networks are limiting EDV’s access to some products, particularly imported drinks.
Changes to earnings forecasts and investment view
We make negligible changes to FY22-25 earnings estimates but note that forecasting remains difficult and demand for EDV’s products and services will depend on consumer spending decisions in a more normal operating environment.
Our PE-based target price increases to (login to view) on the back of the improved outlook for Hotels with future lockdowns less likely as vaccination rates increase across Australia.
While we retain our Hold rating, we believe EDV provides good leverage to a reopening of the NSW and VIC economies despite some likely moderation in at-home consumption going forward.
Key upside risks include stronger-than-expected sales growth, higher margins and value-accretive acquisitions.
Key downside risks include adverse changes to liquor and gaming regulations, government-imposed lockdowns, greater competition, and increased ESG consciousness from investors.
Find out more
Download full research note
If you would like access or more information, please contact your adviser or nearest Morgans office.
Request a call
Find local branch
Need access to our research?
You are also welcome to start a two-week trial of our online platform, which provides access to detailed market analysis and insights, provided by our award-winning research team.
Create trial account
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.