Australia: Australia’s big boozy spinoff gauges ESG’s S value

Woolworths is about to provide a closer look at ESG shopping lists. This Friday, shareholders will vote on the A$55 billion ($43 billion) Australian supermarket chain’s 2019 proposal to carve out its alcohol retailers and pubs. Independence should help both businesses grow faster and distil attitudes on the tricky social elements of investing.

There is financial logic to demerging a group that derived most of its A$10.6 billion in revenue in the year to June 2020 from some 1,600 Dan Murphy’s and BWS bottle shops. Woolworths generates a higher return by sprucing up its grocery stores than, say, ploughing money into hotels or upgrading their poker machines. The division known as Endeavour stands to be one of the 50 biggest listed companies in the country by market value, giving it access to capital to develop its properties.

At 28 times expected earnings, Woolworths fetches one of the industry’s highest multiples, while domestic rival Coles trades on 22 times. Blending the two and using a profit estimate from Macquarie analysts, Endeavour would be worth some A$15 billion. However, a discount of 10% is probably warranted since pub operators like Redcape and J.D. Wetherspoon historically command lower valuations.

The X factor is the S factor, which can be the hardest to assess in the booming field of environmental, social and governance investing. Many good corporate governance standards are well-established while climate-related factors tend to be more easily measurable.

Standalone booze and gambling enterprises aren’t necessarily lumped together as social evils with tobacco or fossil fuels, despite some fund managers simply staying away from them. Backlash can be swift and brutal, though, when investor tastes change.

Endeavour’s cause will not be helped by recent efforts to open a large Dan Murphy’s outlet in Darwin near dry Aboriginal communities. After abandoning the plan in April, Woolworths last week released a harsh, 144-page independent review that outlined multiple failures and recommendations.

A separate local trend might prove telling. Among some two dozen Australian demergers over the past two decades analysed by Morgan Stanley, the parent’s shares increased 8% on average over the first year while those of the separated companies gained 17%. How Woolworths and Endeavour fare once apart might give new meaning to the benefits of social distancing.

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