Summary:Post market close on December 14, 2022, media outlets (e.g. Bloomberg andAFR) reported that WOW (Buy, A$41.70/sh TP) sold down 98.5mn (5.5%) of EDV shares at A$6.46-A$56/sh for A$636mn. Post the sale, WOW still has ~163mn (9.1%%) of EDV shares remaining. The news articles also note that WOW has no intention of further reducing its remaining stake in the near term. Per AFR, the decision to sell its EDV stake was part of a capital recycle program to buy a more than a 50% stake in PETstock for ~A$600mn at ~11x EV/EBITDA. While Woolworths has not substantiated the potential stake purchase, if true this would be in line with its eco-system growth strategy.
GS Take:As of June 2022, WOW has a conservative ND/EBITDA (pre-AASB16) of ~0.9x with A$2.5B of committed undrawn facilities available and hence WOW would not have needed to sell-down its EDV stake in order fund a potential ~A$600mn acquisition. That said, a capital recycle program can pose high uncertainty in sales and margins as well as a higher cost of debt, so we can see the strategic merit in selling down it's EDV stake for cash.
For WOW: Strategically, the transition from liquor retail and gaming/hotels into pet retail is in line with its strategy of building a retail ecosystem.Additionally, with declining birth rates in Australia (1.70 in 2021 vs. 1.92 in 2011) resulting in relatively higher growth in the Petcare industry (~5% CAGR 2017-2022 to ~5% 2022-2027, Euromonitor) vs. alcohol retail (~7% CAGR 2017-2022 to 4% 2022-2027e, ABS Retail, GSe), the sector growth outlook appears attractive. A PETstock acquisition would have the potential to generate synergies, bringing scale to WOW's existing investment in ~58% of Pet Culture (independently operated online petcare retailer) and its vision to expand everyday care categories (via online marketplace and BigW). Our recent conversation with PETstock's key industry playerGreencrossat our GS Digital Consumer conference showed that the petcare category is a highly loyal business (Greencross ~92% of sales from loyalty program members) with eco-system expansion opportunities (single category shopper ~A$100 spend per year vs. A$1,800 spend full eco-system shopper) and hence if the acquisition does materialize, it could serve as a growth lever to build a new sizeable growth platform for WOW.
For EDV: We expect the sell-down to generate short-term share price pressure and also comes at a time when retail growth (Dan's and BWS) is likely to be muted given high prior year comps and the hotels business is challenged by regulatory tightening expectations. That said, we expect underlying Xmas period trading to be strong, with the Hotels sales/property back to above pre-COVID levels and that implementation of tighter gaming regulations to ultimately be slower than market anticipation given highly fragmented market share with majority of ~7,500+ pubs in Australia are owned by independent publicans. Our sensitivity analysis suggests that assuming gaming is currently ~45% of hotel revenues and ~65% of hotel EBIT, a -10% impact to gaming revenue due to regulatory tightening could impact group EBIT by ~8% and if EV/EBIT multiple erodes from our current SOTP of 15x to 13x, we would derive a SOTP valuation of A$6.80/sh. As such, we view the latest price range of A$6.46-A$56/sh as already largely factoring in gaming regulation risk and is an attractive entry point to a high quality Australian retailer; remain Buy.
Rating, Price Target, Methodology and Risks
Woolworths Group (Buy). Our 12m Target Price on EDV is A$41.70, based on a 50/50 EV/EBIT based SOTP and DCF.
Key downside risks: Worse AU food volumes, increase in competitive intensity, online sales underperformance, retail media benefits not materializing, poor management of cost inflation.
Endeavour Group (Buy). Our 12m Target Price on EDV is A$8.10, based on a 50/50 EV/EBIT based SOTP and DCF.
Key downside risks: Softer retail volumes due to COVID reopening, lower-than-expected pricing growth from premiumization due to shift to value for consumers impacting sales and margins, slower-than-expected growth from refurbishment/acquisitions in hotels, tightening gaming regulations.
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