On-Schedule One Tech Transition Program Will Streamline Operations And Improve Efficiencies

Key Takeaways

• Endeavour Group's renewal strategy and cost optimization programs are set to drive revenue growth, enhance margins, and improve customer loyalty.
  
• Strategic capital recycling and tech transitions aim to streamline operations, boost efficiencies, and support future earnings.
  
• Supply chain disruptions, market discounting, and inflationary pressures threaten revenue, margins, and profitability, with rising finance costs further impacting earnings.

Catalysts

Engages in the retail drinks and hospitality businesses in Australia.

• Endeavour Group's extensive retail and hotel renewal strategy, including significant investment in large-scale renewals and developments, is expected to enhance customer experience, driving revenue growth and improved return on investments.
  
• The company's cost optimization program, endeavourGO, is projected to deliver substantial savings by FY26, enhancing net margins and offsetting inflationary pressures.
  
• The successful execution of the One Endeavour Tech transition program, on schedule and within budget, is expected to streamline operations and improve efficiencies, positively impacting future earnings.
  
• Strengthening customer membership programs and innovations in Pinnacle Drinks are likely to enhance customer loyalty and sales, potentially leading to increased revenue and improved net margins.
  
• Capital recycling and improvements in the property portfolio provide opportunities for asset value realization and reinvestment, likely supporting revenue growth and enhancing capital discipline.

Endeavour Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Endeavour Group's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.7% today to 4.2% in 3 years time.
• Analysts expect earnings to reach A$550.2 million (and earnings per share of A$0.31) by about March 2028, up from A$459.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$485.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.0x on those 2028 earnings, up from 15.3x today. This future PE is lower than the current PE for the AU Consumer Retailing industry at 21.1x.
• Analysts expect the number of shares outstanding to decline by 0.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.93%, as per the Simply Wall St company report.

Endeavour Group Future Earnings Per Share Growth

Risks

• The significant supply chain disruptions, particularly at the Melbourne liquor distribution center, have affected sales beyond the 17 days of the industrial dispute and could continue to negatively impact revenue and earnings.
  
• Retail sales have been affected by deep discounting in the market, resulting in lower margin sales mix and operational deleverage, which could put pressure on net margins.
  
• The ongoing inflationary pressures, particularly on wages and electricity costs, may continue to increase the cost of doing business and impact bottom-line profitability.
  
• The decline in consumer spending, reflecting in subdued sales performance and a shortfall in premiumization trends, poses a risk to future revenue growth.
  
• Higher finance costs due to lease interest expense and debt interest could exert pressure on net profit after tax, affecting overall earnings.

Valuation

• The analysts have a consensus price target of A$4.819 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$4.1.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$13.2 billion, earnings will come to A$550.2 million, and it would be trading on a PE ratio of 19.0x, assuming you use a discount rate of 6.9%.
• Given the current share price of A$3.93, the analyst price target of A$4.82 is 18.5% 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.