endeavourGO Program Will Streamline Operations And Boost Shareholder Value

Key Takeaways

• Endeavour Group's cost optimization and streamlined operations are likely to enhance net margins and shareholder returns positively over the long term.
  
• Increased digital engagement and strategic property value unlocking are expected to support future revenue growth and potentially boost earnings and dividends.
  
• Inflationary pressures, increased competition, and rising finance costs could erode profitability, while effective program execution and cost-saving measures are critical for sustaining growth.

Catalysts

Engages in the retail drinks and hospitality businesses in Australia.

• Endeavour Group's focus on streamlining and simplifying business operations through their endeavourGO cost optimization program is expected to deliver A$290 million in savings by F '26, which can positively impact net margins.
  
• The development of a leading omnichannel offer is driving increased engagement, with digitally influenced sales growing and active app users rising by 12%, which should support future revenue growth.
  
• Progress in separating systems from Woolworths through the One Endeavour program is anticipated to simplify technology landscapes, potentially lowering operational costs and impacting net margins positively in the future.
  
• Strong capital discipline, as evidenced by reduced CapEx, improved working capital, and a strategy to unlock value from the property portfolio, could enhance earnings per share and bolster shareholder returns in the long term.
  
• The planned hotel renewals and the potential for unlocking value through capital partnerships on property redevelopments are anticipated to yield high returns, thereby potentially increasing future earnings and dividends.

Endeavour Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Endeavour Group's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 4.2% today to 4.1% in 3 years time.
• Analysts expect earnings to reach A$534.5 million (and earnings per share of A$0.3) by about February 2028, up from A$512.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.4x on those 2028 earnings, up from 14.7x today. This future PE is lower than the current PE for the AU Consumer Retailing industry at 22.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.69%, as per the Simply Wall St company report.

Endeavour Group Future Earnings Per Share Growth

Risks

• The increase in finance costs due to higher average net debt and elevated interest rates could put pressure on net profits, as seen with the A$306 million finance costs that led to a year-on-year decline in net profit after tax.
  
• Inflationary pressures, including significant wage hikes (over 6%) and increased lease costs, could impact the company's cost base, potentially eroding net margins if not adequately mitigated through cost-saving measures.
  
• The One Endeavour program poses financial and operational challenges, with anticipated program costs peaking in FY '25 and '26, which may impact capital allocation and cash flow management.
  
• Softening market conditions and increased competition in both retail and hotel segments could negatively affect revenue growth, as seen in softer trading conditions and the need to double down on price and value for customers.
  
• Dependency on effective execution of the endeavourGO optimization program to achieve targeted savings is crucial; failure to deliver the planned A$290 million in cumulative savings by FY '26 could result in higher operational costs and reduced earnings.

Valuation

• The analysts have a consensus price target of A$5.024 for Endeavour Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$6.1, and the most bearish reporting a price target of just A$4.2.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$13.1 billion, earnings will come to A$534.5 million, and it would be trading on a PE ratio of 20.4x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of A$4.2, the analyst price target of A$5.02 is 16.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.