CRITERION: Catch a falling Star?

The fate of two so-called ‘sin’ stocks shows that whirring pokies and selling crateloads of booze are no longer a sure-fire source of never-ending profits.

For some years, sin stocks have been disavowed by institutional investors, if only so they can tick the box on their environmental, social and governance mandates.

This time they are under attack from their own, with pokies king Bruce Mathieson taking the board of Endeavour Group (ASX:EDV) to task over a long list of alleged – er – sins.

Endeavour houses Woolworths’ liquor retailing assets and the hotels within Australian Leisure and Hospitality (ALH Group), which operated as a joint venture between the grocer and Mathieson.

Endeavour demerged from Woolworths in June 2021.

Pokies are under perennial regulatory pressure that won’t abate any time soon – think of $100 cash limits and reduced trading hours – but the Mathieson camp’s cannons are aimed at the liquor side.

Accounting for 15 per cent of the stock, Mathieson cites a “confused” merchandising strategy, loss of market share and deteriorating profitability relative to its peers.

Amid heightening tensions last week, the board agreed to let shareholders vote on electing the group’s candidate, former Woolies CFO and supermarkets chief Bill Wavish, to the board.

The Mathieson camp now wants the October 31 pow-wow delayed, citing the company’s “chaotic and misleading” shareholder communications.

On the other side of the trenches, Endeavour chairman Peter Hearl also takes umbrage at the suggestion that management couldn’t organise a knees-up in a brewery.

He accuses the detractors of misleading commentary, which ignores the known regulatory headwinds facing the business.

So how bad has Endeavour’s performance really been?

Endeavour boosted revenue by 2.5 per cent in the 2022-’23 financial year, to $11.9 billion with earnings before interest and tax (EBIT) growing 10.7 per cent to $1.023 billion.

It was a tale of two divisions, with liquor sales declining 1.8 per cent to $9.9 billion, with EBIT shrinking 1.2 per cent to $658 million. Hotel divisional sales grew 31 per cent to $2 billion and EBIT soared $428 million. That was in the first uninterrupted year post-pandemic, so one could expect a decent bounce.

Compared to the pre-pandemic year of 2018-19, the EBIT of both divisions was up about 22 per cent. Given that, the performance would hardly seem the “disgrace” alleged by the Mathieson camp, but no doubt there is room for improvement.

As always, the ultimate arbiter is the share price: down some 13 per cent since listing and 36 per cent off its August 2022 high of $8.30.

EDV share price chart

Mathieson’s grumpiness might also be explained by his 10 per cent holder status of Star Entertainment Group (ASX:SGR), the result of him backing the stricken casino operator’s $800 million emergency raising back in February.

That raising was executed at $1.20 – a 21 per cent discount.

Now Star is in the throes of a surprise $750 million follow-on effort, also by way of a placement and rights issue struck at a lowly 60 cents (a 20 per cent discount).

Star is also replacing $668 million of short-due debt with a $450 million four-year package with kinder covenants.

Once bitten and twice shy, Mathieson reportedly declined the kind opportunity to participate again and avoid diluting his stake.

But if the view of Star-watching analysts is right, Star’s fortunes may well be at their nadir given the extent of balance sheet repair and improved trading conditions as inbound tourism picks up.

Star’s $1.6 billion valuation is supported by $1.7bn of property, a key variable being how much it could be whacked by Austrac over alleged money laundering transgressions.

Still, investors pondering whether to weigh in to the $185 million retail rights component, which closed yesterday, may have been wary of chasing their losses.

SGR share price chart

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

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