Omicron and flooding in northern NSW and Queensland affected Endeavour Group’s 3Q22 sales performance. The re-opening of the economy has helped the hotel business to regain its footing, but retail liquor sales will steadily normalise from last year’s lockdown boost.
Endeavour Retail experienced a 1.3% decline in comparable store sales for 3Q22. This is a trend that should continue into 1H23f but is mainly a normalisation of the sales profile. Off-premise liquor retailing benefitted strongly during the lockdowns enforced by state governments due to the pandemic over the last two years. This was magnified by the unavailability of on-premise business and the lack of duty-free liquor sales.
Of the liquor industry’s 14% average annual growth, we estimate that more than half came from these transitory factors. What we are seeing in the sales figures now is an unwinding of these factors which we expect will take around 18 months.
The headwinds facing retail liquor sales will not be completely lost as sales shift back to the on-premise hotel business and as international travellers return to making duty free purchases of alcohol.
Overall, from an elevated growth rate of more than 14% in FY21, we expect the liquor industry growth rate to fall 2% in FY23f before returning to modest growth in FY24f.
Endeavour Hotels reported sales of $405 million in 3Q22, an increase of 3.8% over the same quarter last year. Adjusting for the different timing of the Easter break, growth was 2.5%. Encouragingly, the final seven weeks of the quarter saw sales growth of 7.1% indicating the recovery of on-premise is well underway as restrictions finally disappear. This trend is expected to extend into 1H23f as long as lockdowns remain a thing of the past.
In context, hotel earnings will represent approximately 37% of group earnings in FY23f. The recovery in hotel earnings will be diluted by the softer outcome in retail liquor which is likely to see lower margins and negative operating leverage.
Considering the favourable conditions for the retail liquor business in the last two years, it is unsurprising that online sales have now passed the $1 billion mark on a rolling 12-month basis. That represents approximately 10% of total retail liquor sales. The number of MyDan’s members has stretched to 6.4 million from 3.1 million in FY19 just prior to the pandemic.
Amidst a national frenzy of pub acquisitions in the last year, EDV has acquired two new properties in South Australia. The portfolio is now up to 344 hotels at the end of the quarter.
Investment view
EDV has defensive characteristics and enjoys a strong market position in both retail liquor and hotels but does carry some regulatory baggage with its exposure to gaming and liquor licencing laws. It currently trades on a PE ratio of 25x FY23f eps based on consensus forecasts. We think EDV should trade at a discount to WOW and a small premium to COL and we see fair value at around 24x.
Risks to investment view
EDV operates in the liquor, gaming and tobacco sector which are areas of close public and government scrutiny. Changes to relevant regulation or taxes could affect earnings.
Recommendation
We have retained our Hold recommendation.
