Endeavour Earnings: Underlying Growth Trends Unhindered by Near-Term Labor Cost and Regulatory Woes

We maintain our investment thesis and AUD 6.10 fair value estimate for wide-moat Endeavour EDV. Fiscal 2023 results were broadly in line with our expectations. Net profit after tax of AUD 529 million beat our estimates by 3%, largely driven by stronger-than-expected operating profit margins in the hotels segment.

However, we expect Endeavour’s pretax profit margins to fall by 40 basis points to 6.1% in fiscal 2024. We anticipate mid-single-digit rises in hourly wages to more than offset savings from a newly introduced roster optimisation system.

We forecast virtually flat net profit after tax for fiscal 2024, despite our expectation of 5% sales growth. In the first six weeks of fiscal 2024, sales growth was slightly less than our full-year estimate, but momentum is building. Versus the previous corresponding period, retail sales are up by 3% and revenue for hotels is up 5%.

We think liquor demand is defensive relative to discretionary retailing categories like household goods and fashion. We expect demand for liquor to be underpinned by inflation and population growth, while the premiumisation trend counterbalances the structural decline in per capita liquor consumption. Unlike some other retailers, Endeavour hasn’t seen its customers trading down but has rather seen a continuation of the premiumisation trend. Conversely, Australia’s largest discount department store, Kmart, reported in May 2023 customers started trading down. And both Woolworths and Coles recently posted significantly stronger sales growth in their private-label products than in third-party national brands.

Shares in Endeavour appear slightly undervalued at current prices. Our fair value estimate implies a P/E ratio of 21 times fiscal 2024 EPS, which we think appropriately accounts for the group’s growth outlook—a five-year EPS CAGR of 3%—and the relative defensiveness of its earnings. Based on our fiscal 2024 estimates, Endeavour offers a yield of 3.7% on a P/E of 20 at the current share price.