Australian supermarket giant Woolworths, recently slammed as the “worst” pokies operator in Australia for over-serving alcohol to gamblers, could rebound nicely after it completes a plan to offload its pubs and pokie operations. But its spun-off company, the result of a merger of Endeavour Drinks and the pokie operator ALH Group, may be rejected by some investors and trade at a discount, according to analysts who spoke to the Sydney Morning Herald.
According to the publication, ethical investment funds controlling billions of dollars may look to invest in Woolworths after the firm “cleanses itself from pubs, poker machines and bottle shops” through a proposed demerger, IPO or trade sale.
The new $10 billion company may not fare as well. Deutsche Bank analyst Michael Simotas said Endeavour should be valued at a discount to Woolworths due to the “environmental, social and governance” risks of running a gaming operation; the threat of increased gaming regulation; its lower growth prospects; and the fact it does not have the customer data owned by Woolworths.
The NSW gaming regulator is currently pursuing disciplinary proceedings against ALH over revelations staff at its venue gave patrons free drinks to encourage them to gamble more. Simotas has a hold rating on Woolworths and said a ratio of 20 times earnings was an appropriate valuation for Endeavour.
“The largest benefit in our view is the isolation of the gaming exposure—not only for socially aware investors but because a global trend is rapidly emerging that socially responsible consumer businesses are outperforming those which are not because it is what customers want,” Simotas said.
Morphic Asset Management is one ethical investment firm that would consider buying shares in the supermarket after the demerger, said Chief Investment Officer Chad Slater. “On an ESG risk audit this thing has a lot of issues. Even if you could own it from an ethical standpoint, I probably wouldn’t take on the risks.”
A report from the Responsible Investment Association Australasia found that close to $1 trillion is now managed in Australia by “responsible” funds, representing 44 percent of total professionally managed funds, the Herald reported. Of that, about 45 percent is in funds that use ESG risk assessments while about $200 billion is in funds that screen out certain industries or activities thought to be socially harmful.
The report said gambling is the third most common industry to be screened out of ethical funds and is excluded in 82 percent of cases, putting it behind tobacco and controversial weapons.
“The reason we don’t own them is because long term, these businesses are stuffed. But that’s not going to change their short-term (price-to-earnings) multiple. There’s always going to be people who will buy the stock.”
Bank of America Merrill Lynch analyst David Errington likes Woolworths’ proposed demerger, and estimates it could create $2.5 billion in incremental value by “liberating” the supposed vice companies from Woolworths and making it possible to invest in other growth opportunities.
