The hangover

RESULTS ANALYSIS

Need To Know

• Group EBIT $1,023m just below consensus. EPS -2.3% cf consensus. Targeting $200m cost-out over next 3 years.
• Added net 10 hotels including 50 retail outlets.
• Victorian gaming regulation changes will impact Hotel division in time.

Investment Implications

A hangover result as Endeavour sheds the pandemic boom and customer behaviour resets to normal. Operating costs have taken the edge off EDV’s results and this is a key focus for management.

FY23 result. Group net profit $529m below consensus at $543m, EPS 29.5cps cf market at 30.3cps. Group EBIT $1,023m close to consensus at $1,030m.

Retail EBIT slipped -1.2% to $658m on a -1.8% revenue outcome as post-pandemic sales trends take effect. Reflecting that scenario, in-store sales offset the decline in online sales. EDV improved gross profit margin by 53bp on the back of strong brands and strategic investments. EBIT fell -1.2% but margin was steady at 6.6% as the cost of doing business stayed the same as last year.

EDV added 11 new hotels to the group taking the total to 354 properties. With six of these in Queensland, where liquor store licences are attached to hotels, EDV added 15 retail stores as a result. The company completed 46 renewals continuing the strategy that is enhancing value across the portfolio. The Brook Hotel in Queensland is an example of the heavy capex ($30m) that is refreshing not only the food and bar experiences, but also the accommodation aspect. EDV also added a new Dan Murphy’s store as part of this renewal.

As is now customary, EDV made almost no mention of its gaming activities which we estimate contributes more than a third of the Hotel division revenue. The impact of the recently announced changes to gaming regulations in Victoria (where EDV has 38% of its >12,500 EGMs) may take 2-3 years to implement and could trim earnings by low single-digit increments. The regulatory threat could potentially spread to other states with similar consequences which we see as likely given the constant creep of gaming regulation.

Outlook. Rising labour, supply chain and energy costs will linger on into FY24 placing pressure on EDV to manage both price and cost elements of the business. Retail trading has been ‘resilient’ across 4Q23 and for the first 6 weeks of FY24 (+2.5% on pcp). Trading momentum in hotels is similarly positive so far in FY24 (+4.6% on pcp), led by Food and Bars drawing customers to venues. The 2H23 squeeze on Hotel margins has caused EDV to focus on greater cost control over the next three years at the group level. EDV is targeting a $200m cost optimisation program over FY24-26 though details are yet to be released.

Investment View

Higher operating costs in 2H23 have triggered a big response from EDV to extract $200m of cost over the next three years. This aspect tarnished an otherwise reasonable result in which trading is back to normal – customers visiting pubs and buying liquor in-store.

EDV nudged up its dividend payout ratio to 74% as a signal of confidence in the business and is sitting on $893m of franking credits. The balance sheet, however, is carrying net debt of $1.9bn with leverage at 3.6x (net debt plus lease liabilities to EBITDA). Higher inventory and income tax payments weakened the cash realisation ratio to just 70%.

There are few catalysts to lift EDV from its 19x FY24 PER. If anything, the gaming regulation changes may cap any re-rate on hotel earnings. For these reasons, we think EDV is fairly valued at the current levels. 

Figure 1: EDV earnings