COMPANY DATA

Source: Bloomberg

Company Description

INVESTMENT SUMMARY

We rate DMP as a Neutral due to the following reasons:

• Potential for solid growth in Europe and Japan, substantial opportunities, that the Company is positioned to take advantage of.
• DMP is ahead of the curve with the use of technology and innovative offerings for its customers.
• Acquisition in Europe to bring in top line revenue growth.
• FY19 guidance may be difficult to achieve, given the margin expansion required.
• Strong management team.

We see the following key risks to our investment thesis:

• Acquisition integrations not going to plan.
• Missing market expectations on sales and earnings growth.
• Dietary concerns that drive customers to healthier alternatives.
• Increased cost in ingredients and labor.
• Market pressures from the competition.
• Departure of key management personnel.
• Corporate office having to increase financial support to struggling franchisees.
• Any further negative media articles especially around underpayment of wages at the franchisee level.
• Any emerging concerns around store rollout (such as cannibalization or demographics not supportive of new stores).
• Increase in commodity prices due to ongoing drought in Australia.

Figure 1: DMP revenue by region

Source: Company

Figure 2: DMP EBITDA by region

Source:  Company

• Key highlights from FY18 results. DMP reported NPAT of $136.2m, up +15.0% on pcp after normalizing for share buyback costs, driven by growth in all markets. Total sales grew by +11.7% to $2.59bn, underlying earnings per share (EPS) was up +14.4% and online sales grew +19.4% pcp (account for 63.9% of total sales now). Operating cash flows were up +39.6% to $185.4m and free cash flow before acquisitions grew +125.8% to $120.6m. Return on Equity improved and was 37.7% for FY18, benefiting from the share buyback, funded by low interest bearing debt but DMP increased its net leverage ratio from 1.1x to 1.5x, primarily driven by share buy-back, Hallo pizza acquisition and Japan’s minority interest purchase.
• Segments. 1. ANZ experienced SSS growth of +4.5% and ANZ stores delivered revenue of $341.1m, up +3.5% on pcp, EBITDA of $133.2m, up +15.4% and EBITDA margin of 39.1%. Australian sales performance was affected by uncertainty prior to the introduction of modern award wages, but the new system has been successfully implemented now and DMP no longer faces headwind of award modernization. 2. Europe SSS sales grew +5.7% driven by strong performance in the Netherlands and Belgium, revenue grew +25.1% to $407.2m and EBITDA grew +25% to $74.9m despite lower than forecast sales in France (affected by increased food costs). 3. Japan’s SSS increased +0.9%, led by strong SSS growth in 2H18 (+3.5%), partially offset by decline of -1.9% in SSS growth in 1H18 due to the depreciation of the Yen vs AUD and softer sales in December. Japan stores recorded EBITDA of $51.5m down -8.1% on pcp.
• SSS sales below FY18 guidance. The same store sales (SSS) across the group rose +4.3%, falling short of guidance in Australia/NZ (+4.5% actual vs 6-8% guidance) and Europe (+4.7% actual vs 6-8% guidance), however in line with guidance in Japan (0.9% actual vs 0-2% guidance).
• FY19 guidance disappointing and 3-5-year outlook. Management expects group sales growth of +3-6%, EBIT of $227-247m and net capex of $60-70m for FY19. The Company expects to increase the store count by 225-250 in FY19 and expects further costs relating to ANZ-IP dispute and integration of Hallo pizza to flow through FY19. DMP reaffirmed its 3-5-year outlook, expecting annual same store sales (SSS) growth of +3-6%, annual store growth of +7-9% and annual net capex of $60-70m.

FY18 RESULTS SUMMARY…

Figure 3: DMP FY18 Results summary – key numbers

Source: Company, BTIG

FY18 highlights.DMP reported NPAT of $136.2m, up +15.0% on pcp after normalizing for share buyback costs, driven by growth in all markets. Total sales grew by +11.7% to $2.59B, underlying earnings per share (EPS) was up +14.4% and online sales grew +19.4% pcp (account for 63.9% of total sales now). Operating cash flows were up +39.6% to $185.4m and free cash flow before acquisitions grew +125.8% to $120.6m. Return on Equity improved and was 37.7% for FY18, benefiting from the share buyback, funded by low interest bearing debt but DMP increased its net leverage ratio from 1.1x to 1.5x, primarily driven by share buy-back, Hallo pizza acquisition and Japan’s minority interest purchase. DMP announced a final dividend of 49.7 cps (75% franked), bringing the full year dividend payout to 107.8 cps, an increase of +15.5% on pcp

Figure 4: DMP Financial Summary (A$m)

Source: Company; Bloomberg; BTIG

COMPANY DESCRIPTION

Domino’s Pizza Enterprises Limited (DMP) operates retail food outlets. The Company offers franchises to the public and holds the franchise rights for the Domino’s brand and network in Australia, New Zealand, Europe and Japan.