Australians got back to their favourite watering holes, especially in the last six months, swinging the liquor spending pendulum towards normal. Retail Liquor sales could be softer in FY23f and with pressure on costs, this could mean lower earnings.
EDV’s Retail Liquor business faltered in 2H22 as sales fell 1.3% in the six month period to June 2022. This compares with ABS retail liquor sales growth of 5.6% over the same period. Retail Liquor gross margin was down 120bp to 22.5% in 2H22 which could signal lower earnings for FY23f. Supply chain costs are higher, and discounting has increased in 2H22.
Sales in the first seven weeks for Retail Liquor are down 6.7% and in the absence of specific guidance from the company other than maintaining disciplined cost management, the market will be nervous.
Retail Liquor EBIT in 2H22 was $205 million which was 18% lower than 2H21. EDV had the luxury of fewer discounts during lockdowns, but these have returned in the second half. Labour costs and weather events are more transitory but have impacted on earnings.
The Hotels business sprang back to life in 2H22 as the country left behind the COVID-19 restrictions. Getting back to the pub likely also took some share back from consuming and entertaining at home. EDV added five venues during the year – The Manly Hotel (Qld), The Terrey Hills Tavern (NSW), The Empire Hotel (SA) and The Grand Tasman Hotel (SA). Competition for hotel properties has been fierce throughout the last two years, but with 344 hotels, EDV can afford to be selective about the properties it pursues.
The Terrey Hills Tavern in northern Sydney is a good example where the 1.6ha property was acquired in July 2021 for $40 million. This was ALH’s (EDV) first pub acquisition in 15 years, just weeks after demerging from Woolworths, indicating the difficulty it had while under the Woolworths umbrella. EDV acquired the leasehold (including 20 poker machines) while Charter Hall acquired the freehold for the property. EDV is thought to have its eyes on The Oaks Hotel in Sydney’s Neutral Bay which could sell for ~$175 million, according to press speculation, albeit not necessarily consistent with the recent acquisitions EDV has made.
The Hotel portfolio is not just about acquiring new properties. The company has 49 freehold sites with development opportunity in about half of these. At roughly $15-30 million per site, selection for redevelopment will be well considered and patient. In FY22, EDV renewed 40 hotels amongst division capex of $140 million.
EDV’s hotel portfolio also houses its 12,539 EGMs for which there is no disclosure on the earnings. We conservatively estimate EGM revenue at ~$790 million or about half of the hotel division revenue.
Assuming a conservative margin of 20%, comparable to SkyCity Entertainment’s Adelaide casino which is competitively aligned with the local clubs, we estimate EDV’s EGM EBIT at $158 million in FY22. That implies the residual EBIT of $157 million is attributable to EDV’s non-gaming activities – everything else a pub provides such as food & beverage, accommodation, and entertainment.
EDV has been consistently upgrading its EGM fleet (2,000 in FY22) so that the average age has improved to 6.8 years from 9.6 years at the beginning of FY21. The upgrades will likely drive more revenue as the product suite becomes newer with more jackpot linked machines.
Victorian gaming tax changes and the amortisation of EGM entitlements will have an estimated $20 million pa impact on Hotel EBIT.
Investment view
We see subdued earnings for EDV over the next 12 months from slower sales in retail liquor partly offset by the reinvigoration of the hotel division. The group is spending heavily on property renewals and upgrades that will eventually have a positive imprint.
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.
Figure 1: FY22 result
Figure 2: half-yearly results
Figure 3: online sales
