Leading analyst Douglas Jack, of Numis, has said Domino’s growth prospects are “significant” and undervalued compared to its US and Australian arms.
Reiterating his Buy recommendation he forecast pre-tax profit growth of 26% to £31m for the company’s interim results next week.
He said: “UK LFL sales rose 9.5% in January-February (vs a 14.6% comp). Even though the H1 comp is 11.3%, we would not be surprised if LFL sales have remained close to 10%, aided by strong growth in digital sales (to c.80% of delivered sales), which attract larger, bundled orders. With 8.2m App downloads as at December 2014, we expect at least half of online sales to be via mobile devices.
“UK franchisees’ profits/store rose 26% to £129k in 2014. In 2015E, they should benefit from additional LFL sales growth and gain a further 7% (£9k/store) boost from food cost savings, by our estimates. This supports a virtuous circle of: additional local store marketing (up 11% in 2014); faster expansion; higher total sales and national advertising; leading to additional LFL sales. Given this, franchisees should be able to accommodate the National Living Wage better than its peers.
“We forecast 58 openings in 2015E (UK 50; Germany 3; Switzerland 4; and Republic of Ireland 1) vs 44 (UK 40; Germany 3; and Switzerland 1) in 2014. Reasons to believe the 1,200 store target for the UK could be extended include LFL sales being strong not only in the UK, but also in countries that are 7-10 years more mature than the UK in stores per capita (LFL sales are 12.8% in the US and 10.6% in Australia).
“We expect Switzerland to break even and German losses to fall further. German losses fell from £4.7m in H1 2014 to £2.6m in H2 2014 due to improved operational and central efficiency, even though LFL sales fell 8% in H2 2014. LFL sales were flat in Germany and up 7.7% in Switzerland in January-February 2015.
“We believe there is upside to our 2015E forecast, which assumes just 3% LFL sales growth and falling gross margins for the UK. Given this, a net cash position, zero net rent, minimal capex, and a high digital orientation (at c.80% of sales; the US/Australia are at c.50%), we believe the shares are undervalued (on 26x P/E), particularly in comparison to Domino’s US (P/E: 32x) and Australia (P/E: 56x).”
