Endeavour Analysis_1

Business

Endeavour Group was demerged from Woolworth Group and listed in 2021. Endeavour is operating a combined business of hospitality and liquor retail network with high synergy. It has two main business units, the first is the Retail unit which focuses on liquor selling. Endeavor operates the biggest liquor retail shop network with 1701 shops under the brand of Dan Murphy's and BWS in Australia, and operating own brand business through Pinnacle Drinks, which experienced high growth and is the fourth liquor supplier in Australia. The second unit is the Hotel, mainly operating through the ALH brand. This hotel business is highly comprised of local hotels, which are located in suburban and regional, servicing local guests. ALH positioned its hotel's portfolio in the middle hotel market, the main driver of the total hotel market growth. Endeavour has 354 hotels in Australia and provides food and beverage, accommodation, and gambling services. Now Endeavour is the largest operator of the gambling business domestically.

Endeavour two business units have a high co-relationship as the hotel can obtain liquor and gambling licenses and attract the guest to buy those hotel-related goods and services, which boosts its shop revenue. I think Endeavor has built a great asset portfolio in Australia as no obvious competitors on this scale in the domestic market. This advantage gives Endeavour a stable regular income in its business, even if it experiences high competition.?

I believe acquisition and capital expenditure in new stores are still the key growth drivers in the future, Endeavour's market position, customer data, and financial support from Woolworths will keep high advantages in domestic industry competition.

Revenue and Profit Growth

Endeavour's revenue remains growing after being demerged from Woolworths, but the growth rate is slowing down. The main reason is a retreat of retail business which is dominating Endeavour's revenue, despite the hotel's revenue soaring in the last two years. The total revenue growth looks to recover in 2023 and the first quarter of 2024 as retail revenue growth rebounds, but I think it will keep the low single-number growth as the slow down in hotel growth in the first quarter of 2024.?

Endeavour's operating income has a positive relationship with its revenue. The hotel business has a higher margin than retail and contributed to the main growth of the profit in the last two years.?

Endeavour achieved stable growth records after being listed independently, especially considering operating in the Covid period with a decline in hotel demand and stress on the supplier chain. I think the hotel business will calm down after quickly recovering, and Endeavour needs to think about how to accelerate comparable sales growth beyond new store investment or hotel acquisition.

Margins

Endeavour has a strong profitability record. The total gross and operating margins have kept expanding in recent years. The free cash flow margin's huge decline last year is because of the increase in Capex, gambling license renewal, and inventory acquisition.?

Endeavour's retail business has lower margins but has shown stable growth in the past year. This low and expanded margin means the liquor retail industry is mature and Dan Murphy's and BWS have an advantageous role in the market. The hotel business has a stable gross margin and its operating margin soared in the last three years as recovering from Covid. Based on the average sales per hotel still in growth, I think this will improve the whole operating margin for next year.

Endeavour's profitability is impressive and has proven its advantageous role in the middle-level hotel and liquor retail domestic market. This is a good cash flow business and low risk for dividend investors.

Operating Results

Endeavour has a loyal customer base, and the brand reputation is improving. I think this is a benefit of the lowest price guarantee in Australia. However the voice of customer data is calculated by itself, so it is not independent and may lead to bias. The active member of Dan Murphy's keep growth shows strong customer engagement and will benefit its retail business.

From the quarterly growth data, there is no strong cycle character in revenue, but I can see the retail business is performing badly in 2021 to 2022 as the growth remains negative, this trend has turned upside from late 2022. The first quarter of 2024 shows the growth trend is remaining. After a quick recovery in the 2022 fiscal year, the hotel business generated stable growth. I think the hotel business will not achieve high growth in the future because of the tight gaming regulation and the demand is calm down.?

I noticed a big decline in e-commerce sales, and the penetration has kept declining in recent quarters. I think the brand and reputation are not the problem for Endeavour, so the main reasons may be the customers more to shop liquor offline with a convenient experience, or the delivery service of Endeavour's retail shop is not very good. I see Dan Murphy's provides 2 hours of delivery for $15. So I prefer to believe the first one. Most customers' items in their carts are small and buy liquor with the living goods shopping tourists after back to normal life from Covid. If this is the reason, Endeavour needs to reconsider its capital investment in Ecom or how to combine the service with B&W sales.

Endeavor sped up the capital expenditure spending in 2023, and the main is used for acquiring the hotels and opening new stores. The investment return result is mixed. I can see the total average sales per unit has a little increase to 5.78M from 5.74M driven by hotel revenue rebound, but the retail average sales per shop declined to 5.82M from 6.02M. I am not comfortable with this data, because it shows that retail efficiency declining and new investments do not exchange equal returns. I will watch the average sales data and investment efficiency in the next financial report.

Turnover

Like retail peers, Endeavour invested more capital in inventories, and this decreased its turnover rate and brought some cash pressure for the management because retail growth slowed down last year. The retail growth rebounded in the first quarter of 2024, so the only thing I care about is how long will take to decline the inventory to a normal level and improve the cash turnover. Anyway, I believe Endeavour doesn't have cash pressure as it has a fixed-cost loan facility from related parties, strong profitability, and still good cash conversion days of 10.

Return

From the business operating side, Endeavour has a good return records in the past four years, the ROCE climbed to 12% from 9%, and excess the WACC. This means Endeavour can generate enough return from capital investment in total and can cover the capital cost.?

From the investor side, it is not always good. Endeavour needs to describe itself as a stable dividend income stock in the market, so it remains a high dividend payout ratio from its free cash flow. The Dividend yield and ROE adjusted to book value improved in recent years, mainly because the valuation continue declining. I have seen many headwinds in the past two years for Endeavour, but I still believe this advantage asset in the Australian liquor retail and hotel market will maintain its profitability in the future and low probability of failing in the competition in domestic. So the increase in return rate can give the investor a better opportunity to consider it.

Asset Stability

The asset of Endeavour is stable, which means a high-quality of balance sheet and low risk for financial manipulation. The intangible assets increased because of the renewal of the gambling license in Victoria, and inventory increased because management wanted to keep more stocks as a tight supply chain.

Financial Leverage

Endeavour's main business is offline retail and hotel, which is capital capital-intensive. Endeavour's financial leverage increased last year and around 60%, which increased its insolvency risk. Debt coverage decreased too but still at a healthy level. Endeavour can generate free cash flow, but needs careful management of working capital and Capex, this makes it need stable and enough debt facility on balance sheet to decrease the operating cash flow risk. The good news is the related facility with its old parent Woolworth can provide this for Endeavour.?

Valuation

Many things make Endeavour's price keep declining. Endeavour experienced a COVID-19 lockdown, a stressful supply chain, tight regulation in Gambling, an increase in retail competition, and board exchange. Those headwinds made Endeavour's share lose all returns from the list and the current price is equal to the IPO price. With the price decline, Endeavour becoming more attractive from its valuation multiples.

Conclusion

Endeavour has built a strong asset portfolio in the Australian liquor and hotel market, especially the hotel business is profitable with diversified competition. Those assets give Endeavour an advantage to keep its revenue growth and generate stable profit. So it is a good company with a positive growth record in hard times, strong profitability, a scaled loyalty customer base, a stable balance sheet, and increasing ROCE.

I think the most headwinds have finished for Endeavour. The retail business will underpinned by stable spend in liquor and expense discipline, and the hotel business will benefit from the travel growth and expense cut plan. Maybe more guests will come to Queensland as it will hold the Olympic Games. For hotel-related services, I think the tight regulation in Gambling will improve the entry cost and add a market advantage to Endeavour in the long run.?

Endeavour still has many challenges in the future, especially in retail as I notice the efficiency decline and slowing down in Ecom sales. I see the high growth it reported in its owned liquor brand Pinnacle Drinks, Endeavour tries to find new growth and profit engines for the retail business, this is a good thing for Endeavour, but the more important is to keep watching the cash investment efficiency and strategic roles for those new directions.