Since separating from Woolworths last year, Endeavour Group has quietly sailed under the radar. Its maiden interim profit result showed improving profitability even though its hotels business was heavily impacted by closures.
EDV 1H22 EBIT of $556 million was 3.2% ahead of the same period last year. Group net profit was $311 million, an increase of 15.6% on last year so the Board declared an interim dividend of 12.5cps, a 71.9% payout of earnings.
A key factor in the result was the 137bp gain ($81 million) in group gross margin due to sales growth at Pinnacle Drinks, the group’s own label wine business. EDV gave few details on Pinnacle Drinks itself, but this business will support higher gross margins in the medium term. With the expansion of Paragon Wines to include Chapel Hill and Oakridge Wines, we estimate that Pinnacle accounts for about 20-25% of Endeavour Retail’s sales.
Endeavour Retail gross margins are up 239bp on two years ago and we expect fundamentally higher margins given the growth in Pinnacle Drinks during that time. An increase in discounting activity could snip the fresh growth off the tip of this in FY23f.
EDV’s hotels spent most of the period behind closed doors. The business had only 56 days when all 342 hotels were open (vs 37 in 1H21) but still managed to serve up revenue of $680 million and EBIT of $121 million, which was steady on last year. Hotel sales were obviously much stronger in 2Q22 as the economy opened. Hotel EBIT margins were very good at 17.8%.
Operating cost management was a feature of the result considering the COVID-19 disruptions around the country. Compared with two years ago, the cash cost of doing business is down 23% in Hotels (COVID closures) but increased 34% in Retail, a function of the growth in Pinnacle Drinks.
One positive aspect worth noting is the company’s negative working capital of $271 million. This is a stronger position compared to 1H21 but changes to inventory and supply chain pressure may explain this.
Investment view
The outlook for EDV is a recovering hotel business being partially offset by a softening retail business.
Recent trading has been softer with retail sales down 2% and hotels down 2.9% in the first 6 weeks of 2022. Retail sales are lapping very strong results from last year and this will extend throughout calendar 2022.
Even allowing for the continuing volatility in the operating environment, the company is confident about its cost management.
EDV is less inclined to participate in the great pub hunt that has seen a frenzy of transactions in the last two years. With a large portfolio already, the company can focus on organic growth to drive earnings although the balance sheet is good enough to consider appropriate acquisitions.
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.
