Back trading on 24x, looking attractive vs its global food peers
We don't necessarily see any firm upcoming catalysts for Domino's Pizza Enterprises (DMP), although some new tech may be unveiled at the upcoming Investor Day on 9 October. In fact, the AGM trading update for Aust/NZ has the potential to disappoint – although the company has clearly stated that same store sales (SSS) in Australia and New Zealand will slow in the 1H. This 1H slowdown is due to the very high base being cycled (October 2016 SSS growth was +23%), thus DMP's FY18 earnings will be skewed to the 2H. We would hope Europe will pick up the slack in terms of SSS growth with the OneDigital roll-out issues now fully resolved.
Our move to a positive view is predicated on the fact that DMP, at 24.4x FY18F PE, is now trading at a discount to its global peers, despite offering superior growth.
Reminder of FY18 guidance and drivers
Domino's has guided to 20% NPAT growth in FY18. The store rollout (8.4%-9.4% footprint growth), mid single-digit SSS growth and margin improvement across all divisions should deliver this level of growth alone. On top of this, the buyback of the 25% stake in the Japanese business should, in our view, be further accretive to NPAT growth (although the funding costs associated with the buyback have been excluded from guidance). We currently assume a A$150m buyback with A$2.25m of costs in FY18 and FY19. The accretion from this will flow through at EPS.
With the substantial re-basing of consensus estimates having now occurred, the key question now becomes what is the right multiple for this business going forward. Looking at DMP's global peer basket, the average next-12-months (NTM) PE is c25x while EV/EBIT is 18.3x. EPS growth profiles vary within this basket and we therefore believe the most appropriate peer for comparison is DPZ (DMP's US parent) which trades on 30x NTM PE and 21.7x EV/EBIT.
At our share price target, DMP would trade on 28x PE and 20.8x EV/EBIT, still a discount to DPZ, despite DMP's superior growth profile and less leveraged balance sheet.
We upgrade our recommendation from Hold to Add.
Key risks include loss of market share, margin compression, further franchisee staff underpayments, inability to secure store locations for the rollout and OneDigital execution risk in Japan.
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Disclaimer(s): Analyst owns shares.
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