Domino’s Pizza Enterprises Limited

Domino’s Pizza Enterprises Limited (ASX: DMP)is Australia’s one of the largest pizza chains having the highest number of network stores and sales. The company announced its FY18 results in August 2018 with $121.7m net profit missing its guidance of $127m, and further anticipating earnings for FY19 to fall short of expectations to some extent.

FY18 Highlights: Revenue increased by 7.5% to $1154m in FY18 as compared $1073.1 in FY17 mainly on account of increase in Royalties, franchise service and supplier fees. The maximum revenue came from Europe followed by Japan and Australia and New Zealand. Network sales increased by 11.7% from $2318.5m in FY17 to $2588.9m in FY18. The same-store sales growth was up 4.3% this year. The management is expecting to increase the number of stores significantly by 2025 with a 3 to 6% increase in same-store sales every year.
 
Group’s EBITDA increased by 17.65% from $202.54m in FY17 to $238.29m in FY18; but debt/EBITDA also increased from 1.38x in FY17 to 2.19x in FY18 with a net debt of $522.5m and EBITDA of $238.29m in FY18. The net debt increased because of increase in Gross debt. EBIT increased by 18.3% further leading to improvement in margins. The net profit after tax was up by 15.02% from $105.8m in FY17 to $121.69m in FY18 and DMP paid a dividend of 49.7 cents per share. The fast food group added 308 stores to the network, including 145 newly constructed stores during FY18. In addition, an increased free cash flow before acquisitions was noted.
 
DMP had tied up with Alexa this year with new digital technology planned to launch in FY19 including Mobile ordering application, Augment Reality pizza chef ordering via mobile and Domino’s pizza checker.
 
Fundamental analysis: The market cap of DMP was recorded at 3.77bn AUD, with Beta around 1.5x. Revenue has been in an uptrend over the past five years being $588.67m in FY14 to $1153.92m in FY18 with a CAGR of 18.33%. Net profit after tax has also increased with a double digit CAGR. Same was the case with diluted EPS and dividend per share. Fundamentals look strong while the group is now experiencing high level of competition.
 
If we do a peer comparison,DMP has a high P/E ratio of 31.64x while peer median is around 14.06x making the stock look expensive despite the recent fall of about 16% in last six months. It is not able to compensate its investors as it has the lowest dividend yield of 2.44% while peer median is over 3%. Also, the scrip price has been falling at a higher rate from past one month in comparison to its peers. 
 
Technical analysis: The price of the stock has been drastically falling from past one month breaching its six-month support level around $47, moving towards its three-year support level of $39. Over the past five weeks the price has fallen from the levels of $55.68 to $42.02 today, with a dip close to 25%. This has led the price to reach to the lower end of the Bollinger band. The Relative Strength Index (RSI) indicator is visible in positive territory, on the other hand. Thus, the view is a bit mixed.
 
Increasing revenue and improving margins on y-o-y basis backed by increasing number of stores, upgraded mobile apps in pipeline, and reducing costs along with scrip pricing at low levels as per technical charts, exhibit a scenario where stock is under a watch zone and we will evaluate the same for a better investment opportunity while some volatility over the past few months is noted.
 

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