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In the 2019 federal election, Labor’s proposal to abolish cash refunds for excess franking credits went down like a lead balloon. So, will the $3 million cap proposal see Labor revisit history?
One man’s trash is another man’s treasure
New kid on the block Endeavour Group (ASX: EDV) has flown under the radar since its listing in June last year.
Spun off from under the Woolworths Group Ltd (ASX: WOW) umbrella, Endeavour houses liquor retailers Dan Murphy’s and BWS in addition to the pub and hotel operations of ALH Group.
Other notable businesses include popular delivery service Jimmy Brings and exclusive brands under Pinnacle Drinks.
In total, Endeavour operates a store network of 1,667, in addition to 342 hotel venues, 12,364 pokie machines and 290 TAB and Keno outlets.
So much for ESG
At the time of the demerger, it was cited that splitting the two businesses would enable a simpler structure and greater focus on their respective growth ambitions.
Amongst insiders, Endeavour’s management had grown frustrated with the lack of investment in its business compared to Woolworths.
But the primary reason for splitting off Endeavour was Environmental, Social and Governance (ESG).
Large shareholders such as pensions and superfunds have strict investment mandates. Rightly or wrongly, alcohol and gambling are excluded from most.
Current shareholders were pushing Woolworths to spin-off Endeavour. Potential shareholders were withholding capital because of it.
With Endeavour demerged, the Woolworths share price could rerate and market multiple expands.
Ironically since the split, Endeavour has outperformed its former owner, with its share price rising 29% compared to just 10% for Woolies.
As the old adage goes, one man’s trash is another man’s treasure.
A different kind of moat
When talking about moats, network effects or switching costs are the most popular. But Endeavour has a different kind – distribution.
Endeavour is the gatekeeper to Australian liquor retailing.
The business owns the number one and two liquor retail chains, the largest collection of pub venues and the largest liquor loyalty program My Dan’s with 6.2 million members.
Even the established alcohol conglomerates like Diageo (owner of Smirnoff and Johnnie Walker) and Asahi (owner of Carlton Draught, VB and Great Northern) are forced to the negotiating table.
Put simply, if an alcohol brand wants to achieve national reach, it must deal with Endeavour.
This gives the business enormous purchasing power in terms of getting access to the latest products on favourable pricing terms.
An example of Endeavour’s might is the exclusive distribution agreement it signed with popular influencers Inspired Unemployed.
Endeavour exclusively launched its Better Beer brand across its national footprint, which has since become the fastest-growing new beer product in Australia.
Even if the launch had been a flop, Endeavour takes on little risk other than shelf space.
Retailers typically don’t have a lot of leverage when negotiating with suppliers.
But sheer distribution network means it’s holding an ace at every negotiable table.
Any more beers in the fridge?
In its latest half-year result, Endeavour achieved a net profit of $312 million and declared an interim dividend of 12.5 cents.
Annualising these numbers means at the current share price of $7.69 Endeavour is trading on an earnings multiple of 22 and a dividend yield of 3.3%.
There is likely upside to these numbers in the near term, given hospitality venues are only now finding their feet after two years of pandemic disruptions.
And while liquor sales remain 18% above 2019 numbers, it’s unlikely to revert back to those levels anytime soon.
Broker estimates range from $6.62 at Credit Suisse all the way to $7.70 at Macquarie. Morgans and UBS have price targets of $7.28 and $7.20 respectively.
On balance, the Endeavour share price is likely fairly valued given its low growth, defensive business with a solid income profile.
In hindsight, the time to buy was when ALH founder Bruce Mathieson (who still owns 14% of Endeavour) splashed $54 million around $6.49 last year.
Nonetheless, if markets get jittery, Endeavour is an underrated defensive dividend share to pick up for long-term investors.
Disclosure: Lachlan owns shares in Mighty Craft, which has a significant shareholding in Better Beer.
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