A leading analyst has upgraded his growth forecast for Domino’s Pizza ahead of the delivery chain’s interim results on July 23, by 4% for FY12 and FY13 and said that bolt-on acquisitions in Germany would provide additional scale, supporting a franchisee funded rollout in the country sooner than anticipated.
Wayne Collins at Canaccord Genuity said: “We suspect the group is benefiting from strong current trading and, as such, increase our FY LFL sales assumption to 4% from 3%. The majority of this additional growth is likely to be volume, as opposed to price, generated providing margin gains.
“Our new PBT forecast of £47.1m (previous: £45.6m) puts us towards the upper end of the consensus range. Our positive view on current trading is based on: (1) poor Q2 2011 LFL sales comps of +0.7%, (2) favourable poor weather, (3) a strong line-up of sporting events, (4) an increasing shift towards online / ecommerce, (5) the benign cost environment has meant no increase in headline menu prices, and (6) an improving run-rate of new openings.”
Collins forecast underlying momentum continuing into H2 with LFL sales comps of 3.9% and 3.6% in Q3 and Q4 respectively.
He said: “Furthermore, an improving run-rate of new openings could lead to an upward revision of 60 new stores in FY13 and beyond. With new stores generating sales c.20% above the historic average, we estimate that every 10 additional stores could drive PBT by c.£500k in their first full year.
“We believe low-mid single-digit LFL sales are sustainable with profit growth mainly from operational gearing feeding through from new openings p.a. and the maturing of outlets. The most important driver of LFL sales is volume, which has a c.3-4x bigger impact on the group’s earnings as c.70% of gross profit comes from the sale of goods from its commissaries – hence, an acceleration in openings would be optimal.”
Collins said that Dominos is highly cash generative and should generate over £200m of FCF over the next five years, 2.4x larger than the previous five years.
He said: “This should not only provide for increased cash returns to shareholders, but additional investment into product Innovation, E-commerce, and support to franchisees should act as medium-term catalysts. We also feel that bolt-on acquisitions in Germany would provide additional scale, supporting a franchisee funded rollout sooner than anticipated.
“We forecast earnings to grow by a CAGR of 12.5% 2012-16 vs. 18.8% 2008-12. Over the same period, we estimate FCF of £200m will be generated with the majority to be returned to shareholders (76% FCF return rate 2008-11). From a cash flow returns perspective, this suggests returns are unlikely to fade over the next five years with CFROC to average 16% (page 5). This provides for our Quest-derived target of 590p.”
