Leading analyst Douglas Jack, of Peel Hunt, discusses signs of confidence at Domino’s.
Jack wrote a note on the back of the group’s announcement yesterday that it was to buy a further 44.3% shareholding in Domino’s Iceland for £26.7m, taking its ownership to 95.3%. It also announced that it had secured a new £350m revolving credit facility through a syndicate of seven banks
Jack said the new investment “should slightly reduce the eventual acquisition cost and enable DOM to make long-term investments in Iceland”. He added: “As a sign of confidence, the company has increased its target leverage ratio and is recommencing share buybacks.”
He said the pricetag valued the Iceland business at £2.3m per store (23 stores), justified by Iceland having c£35k of average weekly unit sales (AWUS) vs c£20k in the UK. The price being paid is exactly in line with the 65x AWUS multiple that franchisees pay in the UK.
The new facility replaces Domino’s existing £175m facility and raises its target leverage from 1.25x net debt/EBITDA to a range of 1.75 - 2.5x net debt/EBITDA.
Jack said: “We believe many investors have argued that DOM’s leverage is too lowgiven that it has minimal long-term capex and no net rent to pay. In 2019E, we estimate 2.5x EBITDA would be £310m, relative to which we now forecast net debt being £146m, which implies substantial scope to make further share buybacks.
“We estimate that 2.5x net debt/EBITDA in 2024E could enable over £1bn to be returned to shareholders over the next seven years. There is still a net 13% net short position in DOM. We would advise closing this as quickly as possible. We expect LFL sales to be very strong in H1 2018E, particularly Q2, due to the combination of very weak comps, building innovation, an excellent promotion and advertising campaign, and a potentially significant contribution from the FIFA World Cup in Q2.”