Woolworths, Endeavour and Coles share prices: post demerger outlook

Endeavour Group (ASX: EDV), the share price not the company, has somewhat struggled since being spun-off from Woolworths (ASX: WOW).

The stock opened at $6.50 per share during its first day as a public company on 24 June, with 14.6 million shares trading hands during that session.

Since then it has crept lower, with the stock opening at $6.00 per share on 7 June, with a little over 2 million shares trading hands, at the time of writing.

By comparison, Woolworths has seen its share price rise, if only slightly since 24 June, with the stock up about 1.6% in that period.

Supermarkets rival Coles (ASX: COL) is also up since then, though more broadly the retailer has seen its share price crater close to 10% over the past 6-months as investors cool on the stock.

Unlike Woolworths and Coles, with Endeavour only recently listing on the ASX, the stock is yet to be covered by any major, Australian brokers.

That’s not to say we don’t have granular operational data on the company, with the company’s recent operational performance being broken down as part of a May Briefing Presentation.

Overall, Endeavour’s group revenue hit $10.6 billion in FY20, and the company reported $693 million in total earnings (EBIT).

The majority of sales and earnings in FY20 were driven by the company's retail drinks business, which contributed $9.3 billion in sales and $578 million in earnings (EBIT), during that period.

Endeavour’s Hotels business, by comparison, which boasts a portfolio of 332 licensed venues, booked $1.3 billion in sales in FY20 against $171 million in earnings (EBIT).

Despite Endeavour’s Hotels business struggling as a result of the pandemic, some analysts are optimistic that performance will normalise, for both drinks and hotels, once the pandemic abates.

This however represents a somewhat double-edged sword: while the pandemic has proven to be a boon for Endeavour’s drinks business, it has been understandably and decisively a headwind for the company’s hotels business.

Credit Suisse recently reflected on this, saying that they expected to see liquor revenues decline, while hotel revenue is expected to normalise.

‘We expect expenditure on alcohol to return to its historical share of income, implying declining revenue for EDG liquor retail in FY22. EDG’s hotel revenue is expected to recover to its pre-COVID-19 level as the domestic economy reopens,’ Credit Suisse analysts wrote.

According to the investment bank, they expect EDV to report annual earnings growth of 5% across FY22 and FY23.

Hotels weakness no dividend impediment

Looking ahead, Endeavour Group said it was planning to pay a second-half FY21 dividend equal to 70% to 75% of net profits (NPAT).

Commenting more broadly on the group’s dividend policy, in the near-term it was noted that 'Woolworths Group's final dividend and Endeavour Group's first dividend post demerger are, in aggregate, anticipated to be broadly equivalent to final dividend that would have been paid by Woolworths Group if the demerger had not gone ahead.'

Woolworths last two dividends came in at 48 cents per share and 46 cents per share respectively, both at a 30% franking rate.

A question of competition

With any questions concerning Woolworths, there naturally arises questions concerning for Coles, the conglomerate’s arch rival in the supermarkets business. Some have argued that Woolworths is the higher quality business, and it is this quality, which such individuals would point to, that likely explains the valuation gap between the two retail giants.

To that point, Coles trades at around 21x earnings while Woolworths 37x. Analysts from Morgan Stanley, who have an Equal Weight rating and $36.50 price target on Woolworths, note that while Woolworths has historically traded at an 18% premium to Coles. Yet the current environment is a more demanding one.

Overall, Morgan Stanley made two key points underpinning its Equal Weight thesis, noting that Coles 'has narrowed the gap in trading performance' and that Woolworth's 'Significant valuation upside is difficult to achieve given premium to market' as well as Coles.

Macquarie views Woolworths elevated earnings multiple through a different lens, noting that with the retail giant now divesting its gaming and liquor assets, the business 'will no longer have ESG ownership issues [...] or regulatory risks around gaming machines [...], arguably justifying a higher multiple.'

Macquarie, despite describing Woolworths as a ‘best-in-class’ supermarket, noted that they preferred Coles Group on a valuation basis, assigning Coles an Outperform rating and $17.30 price target.

Overall, Coles has an average rating of Buy from analysts, made up of 6 Buy ratings, 6 Hold ratings and 1 Sell rating.

By comparison, Woolworths is slighlty less liked by the sell-side, carrying a Hold rating on average, made up of 5 Buy ratings, 5 Hold ratings and 3 Sell Ratings.

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