Leading sector analyst Douglas Jack has forecast flat pre-tax profit for Domino’s Pizza in H1, with the performance held back by the business in Germany.
Jack, of Numis, issued an Add recommendation at a Target Price of 700p and said the company’s H1 results on 30 July “should highlight levers to drive growth”.
“However, we forecast H1 PBT to be flat, at £22.1m, mostly held back by higher German losses. In Germany, losses should peak this year, such that it becomes a tailwind, rather than a headwind to group growth next year.
“We expect to hold our 2013E forecasts, for which we upgraded our UK PBT forecast by £1m in early July, by assuming 4% LFL sales and flat margins (2009-12: +70bps pa average). Also, we believe our 2013E German forecast of a £6.0m loss is a worst-case scenario. There is a risk of lower 2014E guidance for Germany (currently a £2.5m loss), but we would use any weakness to buy into longer-term growth.”
He forecast 10% PBT growth in H1 for the UK and Ireland (vs 15% in H1 2012, with like-for-like sales up 5.7% and margins up 104bps), “having assumed slightly higher food rebates to franchisees (due to higher LFL volume growth) and NIC charges on share options (due to a higher share price)”.
“In Germany, LFL sales rose 23.8% in H1 but this is not an ideal indicator in our view, with only six (five corporate; one franchised) of 25 stores as at the end of June being mature, following seven openings in H1. Most of the 11 franchised stores traded strongly and the 14 corporate stores have under-performed.
“German loss guidance is £5-6m this year due to higher training costs and corporate stores under-performing. Some of 2013E’s additional £2-3m of costs should be avoided over time by converting corporate stores to franchise, enabling 2014E losses to be lower than 2013E’s. Despite this, there is a risk that 2014E forecast losses could be raised, partly due to the start of the national minimum wage (at €8.50/hour).”
