Domino’s Pizza Group PLC

Domino’s Pizza Group PLC is an FTSE 250 Index listed company. The Group is the biggest pizza delivery operator in the world.

DOM had paid an interim dividend of 3.00 pence per share on 24 September 2021, while the ex-dividend date was 12 August 2021.

Investment Rationale for Valuation – Sell at GBX 422.60

• Decent Profit-Booking Opportunity: The stock price jumped more than 22% in a single day and approached 52 weeks-high levels. Thus, it would be a decent opportunity to liquidate the position and book profit.
• Operational Headwinds: The labour shortages and food cost inflation would continue to create pressure for the remainder of 2021 and FY22 as well.
• Interest Rate Hike: The recent interest rate hike of 0.15% to curb inflation may keep investors’ away from UK Equities.
• Technical Indicators: From a technical standpoint, DOM is hovering around the upper Bollinger band, indicating a bearish price pattern. Furthermore, the 14-days RSI of ~71.24 approaches overbought territory and indicates a correction in the stock price.

Key Risks

• Covid-19 Pandemic: The daily COVID cases in the UK surged to a record 78,610, which may result in increased restrictions over the period.
• Federal Reserve Meeting: The Fed would accelerate the tapering of asset purchases to USD 30 billion per month from USD 15 billion per month. Meanwhile, the interest rate hike would likely happen thrice in 2022.

Q3 FY21 Trading Update (for the three months ended 26 September 2021, as of 14 October 2021)

 (Source: LSE Website)

• Top-Line Business: DOM had shown a marginal growth of around 9.9% in system sales to £375.8 million during Q3 FY21.
• Share Buyback: The Company had completed the £45 million share buyback programme and started the previously announced £35 million programme.
• Disposal: The Company had completed the planned exit from all directly operated international markets with the disposal of the Switzerland operations.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

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

Conclusion

The Company updated yesterday that it had managed to settle a long-running dispute with its franchisees over a fairer distribution of profits and investment. Moreover, the stock price surged more than 22%, driven by the news of a settlement with franchisees and approached towards a 52-weeks high. Furthermore, the surprise rise in interest rates by the Bank of England and record Covid-19 cases in the UK may dent the growth prospects. Thus, it would be prudent for the clients to book profit at the current levels on this Company. The stock made a 52-week low and high of GBX 301.40 and GBX 451.80, respectively.

Based on the food cost inflation, increase in interest rates, and unfavourable valuation as done using the above method, we have given a “SELL” recommendation on Domino’s Pizza Group PLC at the closing market price of GBX 422.60 (as on 16 December 2021).

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

*All forecasted figures and Peer information have been taken from REFINITIV.

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

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