Normalisation of consumer activity without lockdowns is almost complete. Endeavour Group is seeing retail sales, including online easing while hotel sales are doing very well.
Retail slowing. We already had a good read on the slowing trend from EDV’s FY22 result in August together with the initial seven weeks’ trading in 1Q23. 2H22 retail sales fell 1.3% compared to ABS retail liquor sales growth of 5.6%. The first seven weeks of the new quarter showed sales were down 6.7% and the full 1Q23 has seen sales growth of -6.2%. Online sales fell harder at -29%. The weakness is largely attributable to the benefits the division had during lockdowns in the same period last year. Excluding online, we deduce that store sales fell by 3%. We estimate industry sales fell by 2% extending the trend of the last 18 months. EDV has possibly been leaking some market share and we would expect to see a reaction to rectify it.
Hotels pumping. In contrast, people have returned in droves to socialise in hotels where sales increased 91% to $538 million. The prior period lockdowns effectively throttled the industry as 40% of hotel capacity was sidelined in NSW and Victoria. Compared to 1Q20 (pre COVID), Hotel sales were up 15% representing a 3-year CAGR of 4.8% pa. Weekly sales are a good measure of trading activity, and this improved to $38 million in 1Q23, up from $36 million in 4Q22. With Christmas approaching, some additional hotels in the portfolio (up 3 to 347) and more refurbishments, we think FY23f sales can grow by 30%. This growth may run into some headwinds if consumers are forced to pay higher power bills and cope with inflation more generally rather than kick their heels up at the local with mates.
Gaming caution. As the owner of 12,539 electronic gaming machines (EGM) across its Hotel portfolio, EDV is aware of the heightened scrutiny from regulators due to the inquiries into Crown Resorts and Star Entertainment. The majority (about 78%) of EDV’s EGMs are located in Victoria and Queensland and in total, EGMs contribute around 6% of group revenue and 24% of group EBIT. EGMs generate much higher profit margins than food and beverage does.
The casino inquiries have not raised any specific questions regarding the operation of EGMs in Clubs and Hotels, but state regulators benefit handsomely from the taxation on EGM revenue. In Victoria, the highest rate of tax on EGM revenue is 65%. Victorian has a cap of 30,000 EGMs with 2,628 of these currently allowed in the casino. The balance is split evenly between Clubs and Hotels. We estimate EDV has around 4,765 EGMs in its Victorian hotel portfolio implying it has approximately 17% of all non-casino EGMs in Victoria.
Investment View
We anticipate slowing retail sales over the next two years for EDV, partially offset by recovering hotel sales and gaming turnover. The gaming aspect may be a limiting factor to EDVs PE ratio which we think represents fair value around 22x. EDV is facing some additional capex and costs as the company transitions to a standalone entity for its IT systems and infrastructure.
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.
