Dominos Pizza: Global growth engine heating up

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Senior Analyst
Date posted:
17 February 2021, 3:30 PM
Sectors Covered:
Consumer Discretionary, Industrials & Developers

  • Domino's Pizza's (ASX:DMP) 1H21 NPAT result was 14% above MorgsE, with 23% revenue growth converting to 33% NPAT growth.
  • The material increase in global franchisee profitability (akin to DMP’s growth) is important and should re-ignite strong rollout growth across all markets – DMP’s key growth driver. 2H openings are expected to accelerate further.
  • A very strong balance sheet position will likely see the group accelerate its growth plans in all markets (both organically and via acquisition) – providing further growth optionality vs our forecasts.
  • We see the potential for a period of synchronised global growth from DMP, something we haven’t seen in some time. Add rating maintained; new PT (login to view).

1H21 result – NPAT +33% yoy

DMP reported underlying NPAT of A$96.2m, +32.8% yoy and 14% above MorgsE. Group SSS growth of +8.5% was above expectations, comprising: ANZ +5.1%; Europe +6.4%; and Japan +36.4%. 21% revenue growth converted to 32.8% NPAT growth.

Japan (sales/margin) was a key driver of the beat (EBIT +107%), although sales were also nicely above MorgsE in ANZ and Europe. Importantly, franchise unit economics/profitability was up in all regions (record levels in Germany and France) which is critical for engagement and store opening momentum.

In regions more impacted by COVID-19/lockdowns, carry-out trade has been materially impacted, but more than offset by growth in delivery.

Importantly, a majority of the growth in delivery has come from new customers with the challenge now to retain these customers which the company is confident of.

DMP ended the period with a very comfortable 1.1x ND/EBITDA position, with the Board declaring a 88.4cps interim dividend (~15% beat on MorgsE).

Recent strong SSS growth trends continue in 2H21

DMP provided its usual 7 week trading update, showing group network sales +20.9%; SSS +10.1% (cycling +6.3%) and 11 new stores (flat on the pcp).

DMP reiterated its 3- year targets for SSS growth (+3-6% p.a.), rollout growth (+7-9% p.a.) and net capex (A$60-100m), however noted FY21 is expected to be above all three.

DMP also provided positive commentary around franchisee economics/profitability, which is key and should be positive for the medium-term store rollout.

DMP’s comfortable balance sheet position also can be utilised to fuel growth across the group (incl. potential acquisitions). The rollout of stores into ‘whitespace’ locations (particularly in Japan and Germany) could also move the dial from a sales/margin perspective.

Material EPS upgrades

Following today’s strong result, we increase our forecasts by 12-20% in FY21-23. We forecast EBIT growth of 31% in 2H21.

In 2H21, we forecast an acceleration in A/NZ and Europe earnings (cycling a weak margin pcp), partially offset by lower growth in Japan (very strong base to cycle in 4Q21).

ADD maintained and revised price target

Today’s result showed strength across all of DMP’s operating geographies.

We believe DMP is as well placed as it has been in some time, and remain attracted to the long-term opportunity via store rollout (and therefore scale benefits), strong SSS trends (which may continue for some time) and potential acquisitions given DMP’s comfortable balance sheet position.

Despite the recent re-rating, we believe there remains continued upside to forecasts and maintain an ADD rating with a revised price target (login to view).

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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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