Domino's Pizza: Big in Japan - Takeaways from Asia Investor Tour

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By Alexander Mees

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Head of Research

Date posted:

07 June 2022, 10:00 AM

• Domino's Pizza's (ASX:DMP) Asian investor tour has focused on the undiminished opportunity for growth in the key markets of Japan and Taiwan. It has already achieved significant improvements in operational performance in both markets since acquisition and it has today reiterated its medium-term network expansion targets.
• The near-term challenges of currency headwinds and inflation continue to intensify. We have lowered our EBITDA estimates by 2% in FY22F and 6% in FY23F to take account of these pressures (we now sit below consensus). This should not, in our view, take away from the significant longer-term opportunity for growth that DMP offers. We reiterate our ADD rating with a target price of (login to view).

Event

DMP has presented its Asian strategy to analysts and investors in Tokyo.

Analysis

Market leadership in Japan and a foundation for growth. DMP has become the clear leader in the Japanese market for delivery pizza since acquiring the business there in 2013. DMP has expanded from 36 prefectures to 47 with greater store density.

Its strategy is to deliver further expansion and it continues to target 2,000 stores over the medium-term (from 919 now).

The adverse change in customer behaviour that occurred following the lifting of the State of Emergency in October 2021 has now stabilised. Since 2019, DMP has achieved 20% more average weekly customers per store; 10% higher average weekly sales per store; 35% higher franchise profitability; and 60bps higher franchise margins.

A strong start in Taiwan. DMP acquired the business in Taiwan last year. It has seen good growth in the past few months and has opened 11 more stores. It targets a position of market leadership (it is currently #2 behind Pizza Hut).

Near-term headwinds but an undiminished longer-term opportunity. DMP has reiterated its long-term outlook for global store count. Its outlook for stores in APAC is 3,600 (up 84%). The Europe future store count was reiterated at 3,050 (up 123%).

DMP expects to grow the network by 9-12% every year over a 3-5 year time horizon. At the group level, DMP has seen 26.75% CAGR of digital sales since FY14. Digital ordering is a key driver of growth and market share gains.

In what DMP describes as ‘the age of delivery’ it sees a key competitive advantage as being its ability to be more efficient than its competitors in delivery times.

Forecast and valuation update

DMP commented today that it faces ‘historic headwinds, including inflation, conflict in Europe, and currency movements, but it is focused on the long-term. In the near-term, however, things look challenging.

Our EBITDA estimates decline by 2% to $419m in FY22F and by 6% to $455m in FY23F. This mainly reflects the FX translation impact of a weaker JPY and a slightly lower near-term store rollout assumption.

Investment view

Shares in DMP have corrected sharply since the company warned of slower growth in Japan in late 2021. This pressure was compounded by a 1H22 result in February 2022 that disappointed on margins, notably in Japan where the extent of the rebasing of profitability following the post-lockdown decline in sales took the market by surprise.

We upgraded to ADD after the result and, although inflationary and FX pressures have worsened since then, we believe this is more than reflected in the share price, to which there is meaningful upside over the next 12 months.

Demand for DMP’s product is likely to remain resilient in times of inflation and slower economic growth. Takeaway food has been one of the most resilient categories of consumer spending during periods of rising inflation.

The engine of DMP’s growth is the rollout of new stores. Although near-term store rollout may be slower than DMP would like, the medium-term opportunity is absolutely undiminished, as evidenced by the reiteration of the 2033 outlook today. DMP has developed a solid platform for inorganic expansion.

It has both the financial and managerial capacity to execute further value-enhancing M&A.

Risks

Failure to mitigate cost inflation, especially around food, energy and labour. Further unfavourable movements in FX. Slowdown in store rollout activity beyond our base expectations.

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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.