Domino's Pizza: Set up to deliver

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Former Senior Analyst
Date posted:
20 August 2020, 5:11 PM
Sectors Covered:
Consumer Discretionary (Retail)

  • Domino's Pizza's (ASX:DMP) FY20 result was a ~2% beat on our NPAT forecast, with the performance of Japan largely offsetting COVID-19 disruptions in ANZ/Europe (NPAT +3% yoy).
  • The FY21 trading update showed a continuation of 4Q trends, namely network sales +18.5% and SSS growth of 11% over the first seven weeks. FY21 will benefit from the reversal of ~A$8m of COVID-related headwinds, and potentially a strong pick up in sales as markets are progressively reopened (at this stage). We forecast FY21 EBIT growth of 15%, pending no dramatic market changes.
  • A solid result in challenging conditions and a strong trading update saw the market reward DMP strongly today. However, with DMP trading on 43x FY21 PE (vs parent DPZ on 32.3x NTM PE), we maintain a HOLD with a revised price target (Morgans clients can login to view detailed reports and price targets).

FY20 result – a solid outcome in challenging conditions

Domino's Pizza (ASX:DMP) reported underlying NPAT of A$145.8m, +3.3% on the pcp and +2.4% above MorgsE.

Divisional SSS growth were slightly above expectations, with:

  • ANZ +5.1% (implies +7.2% in 2H20)
  • Europe +2.8% (implies +0.6% in 2H20)
  • Japan +18.4% (implies +32.1% in the 2H)

While revenue/network sales were above, margins were impacted by store closures/support relating to COVID-19.

DMP called out a -A$8.1m EBITDA impact from COVID-19 impacts, with the result ~4% above our EBIT forecast excluding this.

Japan was clearly the strongest division with 26% network sales translating to ~42% EBITDA growth (vs Europe EBITDA +1.8% and ANZ EBITDA -5.8%).

Operating cash flow was strong, with ~113% gross cash conversion.

This saw net debt reduce to a comfortable 1.5x ND/EBITDA, with the Board declaring a 52.6cps final dividend.

Recent strong SSS growth trends continue into FY21

DMP provided its usual 7 week trading update, showing group network sales +18.5%; SSS +11%; and 24 new stores.

DMP reiterated its 3-year SSS and rollout targets, comprising group SSS +3-6% and footprint growth of +7.9% pa.

DMP also increased its long-term store target to 5,500 stores by FY28-33 (vs 5,000 by FY25-30 previously – Japan the driver).

DMP's FY21 store rollout should benefit from some FY20 delays, with Europe and Japan set to have record years of new store adds.

We forecast ~15% EBIT growth in FY21

We forecast EBIT growth of 14.7%/15% in FY21/FY22.

Key assumptions to our FY21 forecasts include:

  • SSS growth of c6.5% (ANZ +6%; Europe +6%; Japan +7%)
  • 6.8% footprint growth (primarily Japan/Europe)
  • A rebound in EBITDA/NWS margins following the impact of COVID on its Europe/ANZ operations.

Hold maintained

Clearly, DMP is benefitting from current COVID-19 trading conditions as markets gradually reopen.

As the dramatic shift to delivery plays to DMP's greatest strength, this drives a greater belief in the store rollout and therefore the Group's long-term prospects.

DMP remains very well placed during COVID-19 and in its wake, however the stock has materially re-rated in recent months and is now trading on an 43x FY21 PE (vs parent DPZ on 32.3x NTM PE).

We maintain a HOLD rating (Morgans clients can login to view detailed reports and price targets).

Key risks:

  1. COVID-19
  2. Increased competitor activity
  3. Inability to secure store locations
  4. Increasing commodity costs
  5. Franchisee support requirement

Find out more

Morgans clients can access further analysis by browsing the latest research on our client website. If you would like access or more information, please contact your adviser or nearest Morgans office. Alternatively, feel free to listen to more podcasts and our 'Reporting Season – August 2020 ' playlist on Soundcloud.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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