Domino’s Pizza Enterprises Limited

Increasing Finance Costs Driven By Acquisitions and Share Buy-Back: Domino’s Pizza Enterprises Limited (ASX: DMP) has recently executed an asset sale agreement for the acquisition of corporate store assets and rights and entitlements in respect of franchise operations in Denmark previously owned by DPS (or Domino’s Pizza Scandinavia A/S) for approximately €2.5 million. DPE expects to restart operations in Denmark with approximately 20 stores within the next year. DPE has revised future store count target in Europe from 2,700 to 2,850 stores.

The acquisition of Domino’s Pizza Japan provided an immediate third profit driver within the business.The Domino’s Pizza Japan FY18 EBITDA exceeded ANZ EBITDA in FY13 (DPJ FY18 A$51.1million vs ANZ FY13 $A49.2 million). Domino’s Pizza Japan now contributes 20% of Domino’s Pizza Enterprises EBITDA and Japan happens to be a crucial source of future growth.


Results Highlights 1HFY19 (Source: Company Reports)

The network sales for the company stood at $1.43 billion for the half year ending 30 December 2018, an increase of 14.6% over the previous half.  During 1HFY19, the company reported EBITDA and Net margin of 18.8% and 7.5% respectively as compared to the industry median of 26.1% and 10.1%, respectively. The underlying EBIT growth was up by 12.1%, in line with FY19 EBIT guidance to stand at $108.3 million in 1HFY19. The company reported additional interest costs due to share buy-back and acquisitions.

Guidance for FY19: The company upgraded the outlook for store growth in Japan and Benelux by a combined +250 stores, with the Group Future Outlook lifting to 4,900 stores by 2025-2028. Moreover, the management forecasted same store sales to be at the mid to lower end of guidance, EBIT to be in the lower end of guidance and new organic stores to be +200-215 for FY19.

The stock performance remained volatile with returns of 2.02% and -17.67% over the past one-month and six months periods, respectively. From the valuation standpoint, it has a higher than industry Price/Cash Flow multiple (Trailing 12 months - TTM basis) as it reported a multiple of 20.2x as compared to the industry median of 11.1x.Further, it reported a higher EV/EBITDA and EV/Sales multiples of 15.5x and 3.4x respectively against the industry median of 9.7x and 1.7x respectively indicating the stock to be overvalued. Currently, it is trading at P/E multiple of 31.72x which is higher than the industry median of 15.8x. Moreover, the DMP’s stock remains shorted share on ASX among peers as per the ASIC report of 17 April 2019. It is indicative of over 9.58% of a short position. Based on the foregoing, we have a wait & watch stance on the stock at the current market price of $42.920 per (down 4.325% on 26 April 2019).
 

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