Is the Endeavour Group sell-off an overreaction?
Shares in liquor retailer and pub operator Endeavour Group have sunk almost 10% this week. Morningstar's Johannes Faul discusses what has investors worried and whether he thinks the market reaction is overblown.
Shares in Dan Murphy’s and BWS operator Endeavour Group (EDV) have sunk dramatically this week on fears proposed pokies regulations could hit the company’s Victorian gaming operations, but the market sell-off may be overdone, according to one Morningstar analyst.
Endeavour Group, which also operates pokies via its nationwide hotel and pub holdings, sank as much as 11% in intraday trading on Monday and has failed to bounce meaningfully in the following days. At around $5.65 apiece, shares in the group are now at their lowest point since it was spun off from Woolworths Group (WOW) and re-listed as a separate entity back in 2021.
This week also marks the first time the group has been re-classified as a four-star, “undervalued” stock by Morningstar, having spent much of its recent trading history in two-star (“over-valued”) or three-star (“fairly valued”) territory.
The Monday fall follows new restrictions proposed by the Victorian government, which include mandatory pre-commitment limits for all electronic gaming machines (EGMs) across the state. Under the proposed regulation changes, the state will introduce mandatory load up limits – i.e., how much money an individual can put into an EGM at a time – which will be capped at $100.
This would represent a major change to Victoria's current precommitment scheme, YouPlay, which is not mandatory and has a voluntary load-up limit of $1,000. Further, the state is also proposing a mandate that would see EGM areas within venues close between 4 am and 10 am.
In a market announcement on Monday, Endeavour Group, which has around 40% of its EGMs located in Victoria, “welcomed” the opportunity to work with the state government.
“There is still a great deal of detail to work through including implementation timelines - and so it is very difficult to speculate on the impact of these reforms at this time.”
“However, it is worth noting that if introduced, these reforms would be consistent with measures either already in place or being considered by several other states, including some of which Endeavour Group is already working with governments and regulators to help trial and introduce.”
Market sell-off 'overreaction'
Morningstar analyst Johannes Faul says that, while the proposed gaming restrictions unveiled by the Victorian government are likely to weigh on Endeavour's long-term earnings, Morningstar estimates the impact on the group's intrinsic value to be less severe than the market anticipates—considering the 10% decline in Endeavour's share price on the back of the news.
“While we also expect New South Wales to follow suit, we estimate the combined decline in earnings at a relatively moderate 7% from fiscal 2025,” Faul says.
Consequently, Morningstar has lowered its fair value estimate on Endeavour by 5% to $6.10, which at current levels means shares are screening as undervalued.
“We expect Endeavour's larger retail segment—accounting for about 60% of group earnings and underpinning its wide economic moat—to be unaffected to changes in gaming regulation,” Faul adds.
Looking forward, Faul estimates the higher regulatory burden to materially reduce gaming revenue in Victoria and NSW by 25%, resulting in knock-on effects to Morningstar’s outlook for Endeavour, but adds that further restrictions outside the group’s Victoria and NSW gaming operations aren’t expected.
“Queensland and South Australia already have relatively low load-up limits at $100, and we don't expect these states to materially tighten EGM regulation.”
“In our base-case scenario, we exclude material gaming reforms in Queensland where about 40% of Endeavour's EGM are located, but we estimate any potential tightening would have a less significant impact than seen in Victoria […] We estimate EGMs are less profitable in Queensland with average turnover per machine about 40% lower than in Victoria.”
Following the share price plunge, Endeavour Group is trading at around a 7% discount to Morningstar’s re-assessed fair value estimate of $6.10 apiece.