Portfolio Update – Purchase of Endeavour Group (ASX:EDV)

By August 2, 2021Portfolio
Across investor accounts, we have bought Endeavour Group (ASX: EDV), the leading Australian liquor retail and hotels operator, which was recently demerged from Woolworths.
With a 40% market share across its 246 Dan Murphy's stores and 1,384 BWS stores, it is the clear market leader in liquor retail in Australia. With 332 hotel venues, it is also the largest player in this part of the industry. Accordingly, we view Endeavour as a high-quality business with good growth prospects.
Their key competitive advantage is their brand and market position. Their key brands, BWS & Dan Murphy's, are amongst the most recognisable in Australia. Endeavour has a dominant market position, compared to its closest competitor in retail, Coles Liquor, EDV has nearly 3x its market share, and its EBIT margins are nearly 2x as high.
We think the longer-term outlook for Endeavour's competitive position is sustainable, and there exists a range of promising growth opportunities. Key growth areas within the retail business include the opportunity to grow sales through the renewal of their store network; increased sales per store/asset utilisation has the capacity to expand margin. The ongoing growth in the number of stores/venues they operate will serve to benefit both the retail and hotels businesses as they can generally co-locate bottle stores on these sites.
A key consideration of the investment in Endeavour is the ESG risks associated with this industry. Due to the adverse impacts of the excessive consumption of alcohol and gambling addiction over time, there may be several factors that lead to reduced sales/ demand or increased operating costs. In addition to this, Endeavour operates in highly regulated industries. Regulation changes could adversely impact the value of the business (lower profits or restrict growth). Lastly, whilst not irrational, competitive intensity in the industry is high. They will need to continually reinvest in their offering to maintain their market position and brand.
To fund the purchase of Endeavour, we are removing Woolworths Limited (ASX: WOW) from the portfolio. Whilst we think Woolworths is also a quality business, it is relatively less attractive than Endeavour. It is subject to more intense competition, has less attractive growth prospects, offers a lower dividend yield longer-term due to its lofty valuation.
As always, thank you for your ongoing support; it is very much appreciated. If you have any questions or would like more information, please contact your SBB Wealth Representative.

 

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EP Financial Services Pty Ltd
ABN 52 130 772 495 AFSL 325 252 (“ELSTON”)
GPO Box 2220
Brisbane Q 4001