Domino's Pizza: Set up to deliver
About the author:
- Author name:
- By Josephine (Jo) Little
- Job title:
- Senior Analyst
- Date posted:
- 20 August 2020, 5:11 PM
- Sectors Covered:
- Consumer Discretionary, Industrials & Developers
- 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.
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).
- Increased competitor activity
- Inability to secure store locations
- Increasing commodity costs
- Franchisee support requirement
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