Weighing up the Endeavour IPO

-- | 18/06/2021

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Lex Hall: Demergers tend to succeed in Australia and the latest one involves Woolworths separating from Endeavour Group which is the leading retail drinks and gaming outlet in Australia. With me to discuss it is Johannes Faul.

Johannes welcome.

Johannes Faul: Thanks, Lex. Good to be here.

Hall: Now tell us first of all Endeavour Group, introduce us to what does it do?

Faul: Well, Endeavour Group is mainly a liquor retailer in Australia. And it owns the very well-known brands Dan Murphy's and BWS, those are the two main brands on the liquor side it owns. Then also a smaller part of the business as that segment will be hotels well let's call them pubs, with gaming machines, but also food and beverage services, and also even accommodation. But the main part of Endeavour is the liquor retailing business. And they are the clear market leader in Australia, they have 50 per cent market share and our numbers are close to and that's about almost three times the size as Coles' liquor business. And what that means is it has huge cost advantages over its competitors, and therefore we ascribe it a wide economic moat. Also, liquor retailing in Australia is a very mature industry, very mature business to be in. And we have seen that historically, the sales growth is very well, very predictable, you can forecast it very well. And we have a lot of confidence in our future sales growth outlook, which also shows in our low uncertainty rating that we have for Endeavour Group, which is similar as Woolworths and Coles, which are mainly food businesses, but also have a similar predictable top line.

Hall: OK, so that's probably a polite way of saying that Australians like to drink and will continue to do so.

Faul: It means first of all, like yes, some people like to drink, but the key drivers are really population growth, which is outside of COVID impacted border closures is fairly predictable and inflation.

Hall: Wide moat, 20-year competitive advantage. So why would Woolworths want to get rid of such a lucrative business?

Faul: Well, it's good question. I mean, you know, we spoke about how lucrative business is and those predictable cash flows also mean it will be predictable dividend payer and with little CapEx required to grow the business quickly because the markets fairly mature. It's going to be strong dividend payer in our minds too. But the reason why Woollies has divested it is firstly to focus on its core supermarkets business. But also really in our minds it's to address any perceived ESG risks. And increasingly globally, especially in Europe, but then also some some in the U.S. in its global trend that more and more funds are looking at that ESG ratings of these companies.

Hall: So moving away from alcohol and…

Faul: Moving away from the gaming operations within hotels.

Hall: OK.

Faul: And to a lesser degree from the liquor retailing. And what's really interesting and something we've been discussing for a while now Lex is that Coles and Woollies tend to copy each other and mirror each other in their moves. With Woollies, getting rid of or divesting its fuel retailing and then Coles did something similar with its deal with Viva. And now Coles few years ago, let go of the gaming operations or the operations of its hotels to another party. And now Woollies is following suit a few years later. So that's just another case in point that those two tend to do similar things.

Hall: OK. You mentioned dividends. What does this demerger mean for Woolworths shareholders?

Faul: What the demerger itself means?

Hall: Yeah.

Faul: Well, the way the demerger is structured is that existing Woolworths shareholders will continue to own their shares in Woolworths that will not change. But what they'll get on top of that is for each Woolworths share the shareholders will receive one share in Endeavour Group. With the demerger what's going to happen however, though is that some of the value that currently sits within Woolworths group will now just be taken out of that group and traded separately. OK, so we'll see that Woolworths share price drop most likely on the day of first listing, which is the 24th of June, so not very far away.

Hall: All right. Thanks for your insights today, Johannes.

Faul: Thanks for having me, Lex.

Hall: And I'll remind Morningstar watchers, you can read Johannes' full research report on Endeavour Group which includes more details on the company and of course his fair value estimate. I'm Lex Hall from Morningstar. Thanks for watching.

This report appeared on www.morningstar.com.au 2021 Morningstar Australasia Pty Limited

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