The Endeavour Group Ltd (ASX: EDV) share price has taken a tumble on Wednesday.
In morning trade, the retail drinks company's shares are down 5% to $6.36.
Why is the Endeavour share price falling?
The weakness in the Endeavour share price has been driven by news that major shareholder Woolworths Group Ltd (ASX: WOW) has partially sold down its holding.
According to the release, Woolworths has agreed to sell 5.5% of the issued capital of Endeavour via a block trade at a price of $6.46 per share. This is a 3.6% discount to where the Endeavour share price closed Tuesday's session.
Endeavour notes that Woolworths retains a 9.1% stake and has no intention to sell any more shares in the short to medium term.
Furthermore, the two companies intend to continue to work closely together. It commented:
Endeavour will continue its close relationship with the Woolworths Group with a range of long-term partnership agreements in place. These include the provision of supply chain solutions through Primary Connect; a joint food and liquor offer through co-located BWS stores and online; payment services provided by WPay; and BWS a key partner of Everyday Rewards.
Broker reaction
Goldman Sachs has responded to the selldown. While it suspects that the news could weigh on the Endeavour share price in the near term, it has retained its buy rating. It said:
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.
Goldman also spoke about the potential headwind from regulatory tightening in the industry. The good news is that its analysts believe the current Endeavour share price has factored in this risk, making now an opportune time to invest. It concludes:
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.
