Endeavour shares tumble 10% on gambling reforms: A tactical buy or falling knife?

Shares of Australia’s biggest pub owner Endeavour Group (ASX: EDV) tumbled almost 10% on Monday after the Victorian Government announced reforms to the state’s gaming regulation. 

Endeavour is typically viewed as a defensive stock given the resilience of its retail businesses (Dan Murphy’s and BWS). In FY22, retail contributed 72% ($666 million) to Group earnings while hotels accounted for 34% or $315 million. The hotels business is the largest owner and operator of electronic gaming machines in Australia.

Approximately 24 million shares traded hands on Monday, which marks the stock’s largest single day turnover since listing on the ASX in June 2021. The stock is now down 11.5% year-to-date, down 28.4% in the past twelve months and trading at levels not seen since July 2021.

This begs the question: Is this a buyable dip? 

Endeavour Group 12-month price chart (Source: Market Index)

First Tasmania, now NSW and Victoria

The Victorian Government announced four main changes to gaming in the state. The changes are expected to be rolled out by year end. These include:

• Mandatory pre-commitment limits and carded play

• Load limits of $100, down from $1,000

• Venues must close pokies machines between 4 am and 10 am (currently 5 am to 9 am)

• New machines will have a sprint rate of 3 seconds, up from 2.1 seconds

What the Street says

Most analysts were quite concerned about the announcement and viewed it as a gateway for potential future crackdowns, which is expected to weigh on Endeavour’s multiple moving forward. The stock currently trades on a trailing PE of 18.5.

Macquarie was the odd one out, retaining an OUTPERFORM rating and a $6.50 target price (From $6.90). The analysts kept its FY23-24 earnings expectations unchanged under the rationale that “the changes will take a number of years to be implemented.” While the price target cut reflected a “lower implied multiple for Hotels given the higher regulatory risk for gaming.”

“We prefer Staples in the current environment as alcohol is resilient in economic downturns. However, risks are building for EDV's gaming operations, with state governments driving reform in the sector,” the analysts said. 

Most other brokers lowered their revenue forecasts by 10-15% for FY25 based on the current structure of the reforms.

JPMorgan downgraded the stock and lowered its target price to $6.70 from $7.80. The investment bank notes that Endeavour has higher exposure to Victoria and the state accounts for approximately 50% of gaming revenue and 15% of Group earnings. 

Likewise, Jefferies downgraded the stock to HOLD from Buy and cut its target price to $6.50 from $8.00. The analysts said the earnings impact is difficult to quantify, but gaming’s high margin and low variable cost means any revenue reduction would take a substantial hit to operating leverage. The reform in Victoria could also pressure other states to implement reform.