Endeavour Group: A good effort despite volatile operating conditions

About the author:

Author name:

By Alex Lu

Job title:

Analyst

Date posted:

22 April 2022, 9:00 AM

Sectors Covered:

Industrials

• Endeavour Group (ASX:EDV) 3Q22 sales trading update overall was slightly better than we expected.
• Both Retail and Hotels sales growth rates (on an Easter adjusted basis) were above our forecasts.
• The key negative however was flood events caused extensive damage to a small number of stores and hotels, which reduced EBIT for the quarter by ~$9m (before any insurance recoveries).
• Following the trading update and factoring in the impact of the floods, we increase FY22-24F underlying EBIT by 1%.
• Our target price rises to (login to view) and we maintain our Hold rating.

3Q22 sales growth was better than expected

Total group sales fell 0.3% (Easter adjusted) vs our -2.7% forecast with both divisions delivering sales growth that was above expectations.

Retail sales holding up well

Retail sales dropped 0.7% (Easter adjusted), which was better than our -3.0% forecast. The result reflected the cycling of solid growth in the pcp and customers returning to on-premise consumption as COVID restrictions began to ease.

Management advised at the 1H22 result that Retail sales were down 2.0% in the first six weeks of 3Q22 and with restrictions easing, we expected a further weakening in sales.

Surprisingly however, sales growth improved in the second part of the quarter which management attributed to some consumers still being hesitant about going out and continued demand from younger customers, who are more accustomed to off-premise consumption.

Online sales remain strong with growth of 16.8% (Easter adjusted). Annualised online sales are now over $1bn with penetration now at 9.6% (vs 8.0% in the pcp). EDV expects further online sales growth, supported by continued investments in digital platforms and engagement.

Hotels sales momentum improves

Hotels sales rose 2.5% (Easter adjusted), which was comfortably above our -1.0% forecast. EDV said trading momentum continued to improve, due largely to the easing of COVID restrictions in NSW and VIC which offset a decline in WA where restrictions tightened.

In terms of categories, management said gaming remained solid with accommodation seeing the strongest rebound as domestic travel picked up. Food and beverage sales however were slower to recover.

Floods impact a small part of the network

EDV advised that flood events caused extensive damage to a small number of stores and hotels. The group suffered ~$9m in damages, which reduced EBIT for the quarter.

This included direct costs as a result of the floods (eg, clean-up costs and asset write-offs) as well as an estimate of lost profits when stores and hotels were unable to operate. EDV said the majority of the impacted sites were reopened by April but five stores and one hotel remained fully or partially closed as at the end of 3Q22.

Changes to earnings forecasts and investment view

We make modest upgrades to earnings forecasts with FY22-24F underlying EBIT rising by 1%.

We see EDV as a relatively defensive business with well-known brands, strong market positions in both the retail liquor and hospitality industries, and solid long-term growth opportunities. However, trading on 24.2x FY23F PE and 3.0% yield we see the stock as fully valued.

Our PE-based target price increases to (login to view) and we maintain our Hold rating.

Risks

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.

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