Domino's structural growth X 3
About the author:
- Author name:
- By Nick Harris
- Job title:
- Senior Analyst
- Date posted:
- 14 August 2014, 8:17 AM
- Sectors Covered:
- Telecommunications, Technology
Domino's Pizza (DMP) reported a strong FY14 profit result and trading update this week.
The clear message from this result is that all three of DMP's businesses have strong sales and earnings momentum which should continue for years to come.
With record store numbers being rolled out (c900 stores to be rolled out over 5 years), margins are set to escalate further as scale benefits flow through. The potential to double its store footprint whilst embracing a dominant digital offering makes DMP one of a kind in our view – one we are prepared to pay up for.
Result snapshot
DMP reported underlying NPAT of A$45.8m, +50.4% on the pcp and in line with Morgans' forecast of A$46.3m. Divisional SSS growth comprised: ANZ +6.3%; Japan +10.7%; and Europe +2.7%.
Interestingly Europe was the key upside surprise of the result (EBITDA margin) with Andrew Rennie already making significant progress with this business.
The turnaround in Europe is in its infancy with the potential for massive earnings growth over the next three years. DMP provided an exceptionally strong trading update (first 5 weeks of FY15), including: ANZ +10.3%; Europe +14.8%; and Japan +6.9%.
ANZ has undoubtedly benefited from the successful launch of the Pizza Mogul and Cheaper All Days while Europe has also benefited from the World Cup.
Outlook: plenty of earnings growth drivers & all organic
DMP provided FY15 guidance, comprising: SSS growth of 4-6% across the group; 175-185 new store openings; c20% EBITDA and NPAT growth; and net capex of cA$45-55m.
This earnings guidance looks particularly conservative to us for a couple of reasons: the strong SSS start to the year (although very early days); the quantum of the store rollout; the margin upside in all jurisdictions; and a full 12 month contribution from Japan in FY15.
We also note management's long track record of providing conservative guidance early in the year. Future store growth and margin upside (Europe and Japan especially) is significant and should underpin at least three years of 20-25%+ EPS growth.
Just can't ignore the growth: Add maintained
We have upgraded our forecasts from FY16 onwards (3-8%), largely due to the benefits of the higher store rollout profile from FY15.
We acknowledge DMP's elevated PE, however we also find it difficult to ignore the group's strong growth prospects over the next 3+ years and the potential for further accretive acquisitions.
Our DCF valuation increases to A$26.30; Add maintained.
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