Domino's Pizza Group

Domino's Pizza Group PLC (DOM) is a British pizza delivery company, based in Buckinghamshire, United Kingdom. The group holds the exclusive right to own, operate and franchise branches of Domino's brand in several European countries, including the United Kingdom, and is a major player in the Republic of Ireland and several other markets. Along with this, the company leases properties and store equipment to franchisees. It has over 1,100 stores across the country and is a constituent of the FTSE 250 index. The company is differentiated into two geographical business units, namely United Kingdom & Ireland and the International.

Recent Development
The Group Chief Executive Officer David Wild announced his decision to step down from his role after a new CEO is in place and an orderly transition has been ensured amid a row with franchisees and struggling European expansion drags on the group. A further update is likely later this year and broad process, which is targeting both internal and external candidates, is in progress to recruit a successor for the role of CEO.

Financial Highlights (H1 FY 2019, in £m)

(Source: Company Filings)

Group system sales increased by 4.7% to GBP 645.8m and group revenue grew by 3.5% to GBP 295.6m. While in the international segment system sales decreased by 3.4% to GBP 49.8m, with a disappointing performance across all market, system sales in UK & ROI increased by 5.5% to GBP 596.0m. Reflecting an improving trend through the first half, UK like-for-like system sales excluding splits was up by 3.9% (1.8% including splits) and ROI like-for-like excluding splits was up by 6.9% (5.4% including splits). Group underlying operating profit decreased by 2.6% to GBP 45.2m even as underlying operating profit in the UK & ROI rose by 7.1% to GBP 51.6m. As the company reported increasing losses in Sweden and Switzerland, with Norway posting the highest loss at GBP 4.1m, international businesses made an underlying operating loss of GBP 6.4m. Reflecting higher interest costs as a result of higher net debt and the increased losses from International, underlying profit before tax was GBP 42.3m, a decline of 7.4% year-on-year. Underlying basic EPS declined by 3.8% to 7.5p and net debt increased by GBP 35.6m to GBP 238.8m. The company declared an interim dividend per share of 4.20p and statutory basic earnings per share was 5.3p, down by 26.4% over the last year.

Valuation Methodology
Method:  Price/Earnings Approach (NTM)


Share Price Commentary
 
Daily Chart as at 07-August-19, before the market closed (Source: Thomson Reuters)
 
On 07 August 2019, at the time of writing (before the market closed, GMT 10:25 pm), DOM shares were trading at GBX 237.40, down by 0.12 per cent against the previous day’s closing price. Stock's 52 weeks High and Low is GBX 305.20/GBX 220.00. The company's stock beta was 1.24, reflecting more volatility as compared to the benchmark index. Total outstanding market capitalisation was around £1.10 billion, with a dividend yield of 4.06%.

 Conclusion
While the UK and Ireland market reported impressive results, visibility in the international market remained limited and trading was challenging. The company is focused on improving its operational capability across its international markets as Iceland profitability was impacted by the weak macro-economic backdrop and increasing losses were reported in Sweden and Switzerland. Another major challenge faced by the company is its dispute with UK & Ireland franchisees, which continues to impact new store openings and some working practices, as the company expects new store opening during the year to be materially lower than the previous year.

Based on the headwinds faced by the group, and supported by valuation undertaken using the above method, we have given a "WATCH" recommendation at the closing price of GBX 237.70 (as on 06 August 2019) based on 14.78x NTM Price/Earnings (approx.) on FY19E Earnings per share (approx.).
 
*All forecasted estimates have been taken from Thomson Reuters.

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