Domino’s Pizza Group PLC (LON: DOM)

Domino’s Pizza Group PLC is an FTSE 250 Index listed company. The Group is the biggest pizza delivery operator in the world. It holds the exclusive master franchise rights in five markets under long term agreements with Domino’s Pizza International Franchising Inc., the international arm of Domino’s Pizza Inc, which owns the Domino’s brand. Its core business is in UK & Ireland.

On 14 October 2021, DOM will release its Q3FY21 trading update.

Recent trend of dividend payments

(Data Source: LSE Website, Research done by Kalkine Group)

The chart above demonstrates the growth in dividend payment done by DOM from FY16 to FY20. The Company maintains a dividend policy of covering the annual EPS of at least 2x. In H1FY21, DOM declared an interim dividend of GBX 3.00 per share, which was paid on 24 September 2021 (Ex-Dividend date: 12 August 2021)

Growth Prospects

• Dominant Position: The Company is the leading delivery brand in attractive and growing segments of the market in the UK, driven by investment in national brand and social media campaigns to drive sales, brand awareness and customer engagement.
• Evolving with Time: The company operate a digitally-driven and agile business model, combining Group’s -owned corporate stores with its franchisee stores network. Almost 95% of UK sales are made online, which gave the company advantage during the lockdown and retained customers.
• Potential Car Collection Business: The Company is planning In Car Collection to grow its share of carrying out, which is likely to drive growth in the future. At the end of H1FY21, the company has 300 stores, with a potential of over 450 stores. The company has planned regional advertising for Q3FY21, and it is getting positive feedback from its customers.
• Key Focus on Core Operations: On 09 August 2021, DOM had decided to exit the Switzerland business for the total consideration of £0.2 million. Moreover, DOM will shift the focus towards core UK and Ireland operations.

(Source: LSE, chart created by Kalkine Group, as of 31 August 2021)

Key Risks 

• Competition: The food industry is highly competitive, and with more & more restaurants opening and delivering online food, the competition is likely to intensify, resulting in lower margins.
• Covid-19: Even Though, majority of the revenue is generated through online sales, the company could still face some damage if the Covid-19 cases result in fresh lockdowns.
• Cyber threat: Inadequacy of IT infrastructure or system failure increases the chance of cyber-attacks. Any such occurrence from an external or internal source could adversely affect the operations and reputation of the Company.
  

Now we will analyse some key fundamental and shareholders statistics of Domino’s Pizza Group PLC. 

Financial and Operational Highlights (for the 26 weeks ended 27 June 2021 as of 3 August 2021)

(Source: LSE Website)

• Strong Revenue Growth: The Company reported revenue growth of 19.6%, driven by strong performance across geographies and aided by the reduced rate of VAT.
• Robust Profitability: The Company had shown a remarkable growth of around 27.7% in the underlying profit before tax to £60.8 million, boosted by the strength of the core business and lower Covid-19 related costs.
• Marginal Growth in Total Orders: DOM had demonstrated a positive trend in the total orders as it grew by around 3.5% in H1FY21, driven by collection orders growth of about 27.1%
• Positive Momentum in Collection Orders: Collection orders traded at 71% of 2019 levels during H1 FY21, and at the end of July 2021, it was trading over 75%.   

Financial Ratios (H1FY21)

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 11 October 2021, at 10:33 AM GMT+1, DOM’s shares were trading at GBX 378.80, down by around 0.47% against the previous day closing price. Stock 52-week High and Low were GBX 443.69 and GBX 301.40, respectively.

On a daily chart, DOM's stock price is sustaining between the middle and lower Bollinger bands. Hence, there could be an uptick in the stock price in the near term. In addition, the 14-days RSI of ~31.64 is inching towards the oversold territory, suggesting an upside momentum in the stock price,

In the last two years, DOM’s stock has delivered a remarkable positive return of ~44.29%. Also, it has outperformed the FTSE All-Share Travel & Leisure index with a return of negative 10.37% and the FTSE 250 index with a return of about 11.87%. 

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook

The Company delivered solid numbers in H1FY21 with the expectation of strong sales for FY21 and FY22. The Company expected growth across geographies based on the revival of economic activities and solid brand popularity & online demand. The Group continues to invest in broadening its sales resource to drive growth and capture the market. The recent launch of the In-Car Collection service, which is now available in over 300 stores, is likely to drive the growth of the company in the near term.

Considering the Company’s focus on core operations, top-line and bottom-line business growth during H1 FY21, the better profitability and operational position of the business than the industry, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Domino's Pizza Group PLC at the current price of GBX 378.80 (as on 11 October 2021 at 10:33 AM GMT+1), with lower-double digit upside potential based on 23.03x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peers/ Industry information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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