Domino's Pizza Enterprises Limited

DMP Details

Domino's Pizza Enterprises Limited (ASX: DMP) is the largest pizza chain in Australia with respect to network store numbers and network sales and is the world’s largest franchisee for the Domino's Pizza brand. The company has the exclusive master franchise rights for the Domino's brand and network across various countries that include Australia, New Zealand, Belgium, France, The Netherlands, Japan, Germany, Luxembourg, Denmark, and Taiwan. The company has a presence across 10 markets and has over 2,800 stores. The US-listed Domino's Pizza, Inc owned the Domino's brand.

Decent Performance in FY21 (For the Year Ended 30 June 2021)

• The company has recorded robust network sales growth across the group up by 18.8% in constant currency.
• Group’s revenue increased by 15.4% YoY to $2,199.1 million supported by strong network sales growth, as well as revenue expansion from corporate stores.
• The company has delivered significant EBIT growth during the period, up by 27.2% YoY to $293.0 million driven by the benefits of sales leverage in all regions.
• Resultantly, underlying NPAT grew by 29.2% to $188.2 million (Statutory growth +32.9%).
• Full Year dividend increased by 45.4% to 173.5 cps (70% franked).

Exhibit 1: Performance Trend

Source: Analysis by Kalkine Group

Acquisition of Domino's Taiwan Completed

DMP, on 31 August 2021, confirmed the completion of the acquisition of PizzaVest Company Limited (Domino's Taiwan). The company earlier in June had entered into a binding agreement to acquire its 10th market, Domino’s Taiwan, which is the second-largest pizza chain in the market.

FY22 Trading Update

The company in its annual general meeting presentation released on 3 November 2021, stated that DMP commenced FY22 with the year-to-date total sales growth of 8.0% (+4.3% on a same-store sales basis). However, the sales growth remained uneven across regions with operations impacted by local conditions.

Strong Liquidity Position

DMP has a strong cash conversion of 105.7% owing to its robust operating performance and working capital benefits. Its free cash flow increased by 40.2%, to $216.2 million in FY21. Moreover, the company has expanded its debt facilities which has positioned the company well.

Further, the board highlighted that it will increase its payout ratio from 70% to 80% of underlying NPAT (after MI), from H2 FY 2021 onwards.  

Key Metrics

The company’s gross margin reduced to 54.2% in FY21 from 62.1% in FY17 and 55.3% in FY20. The company witnessed a sharp improvement in ROE to 46.4% in FY21 from 25.4% in FY17 and from 37.5% in FY20. Further, the current ratio stood at 0.84x in FY21.

Exhibit 2: Key Financial Metrics

Source: Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form 62.60% of the total shareholding while the top four constitute the maximum holding. Notably, Cowin (John James) and Bennelong Australian Equity Partners Pty. Ltd. are holding a maximum stake in the company at 26.65% and 7.77%, respectively, as also highlighted in the chart below.

Exhibit 3: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Risks

The group is exposed to liquidity risk as well as market risk such as foreign currency, interest rate and commodity price risk; and credit risk. The Group’s activities expose the company mainly to the Euro and Japanese Yen currencies and to the interest rate risk that arises by its borrowings.

Outlook

The company remains focused on the long-term growth ahead. The company remains hopeful of delivering significant profit growth over the medium term, owing to new store openings and network sales growth. DMP's business has the track record, as well as the cash flow and expanded debt facilities to execute on its strategy. The management highlighted applying the growth strategies into Australia/New Zealand markets through Project Ignite, which is a multi-million program that aims at developing its store network, and placing the company to meet the existing and future delivery demand. These investments provide confidence to improve its outlook for new store openings for the next 3-5 years to +9-12% from +7-9%. Further, the management increased its forecasts on net capex for the next 3-5 years to $100-150 million from $60-100 million due to its support to franchisees with store expansions. Apart from this, DMP also plans to enhance its digital offerings and invest in its online platforms.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation

The company has delivered 9-months and one-year returns of ~+20.72% and ~+37.40%, respectively. The stock is trading lower than the average price of the 52-week low-high range for the stock at $81.20 - $167.15, which indicates a good opportunity for accumulation.

The stock has been valued using EV/Sales multiple based relative valuation (on an illustrative basis) and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to peer average EV/Sales multiple (NTM basis), considering its store expansion plans, growth investments, digital offerings, and decent liquidity position.

Considering the aforementioned factors, we give a “Buy” recommendation on the stock at the current market price of $118.73 per share, up by 0.08% on 22^nd December 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices

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