Australia | Aug 22 2006
By Chris Shaw
Overseas expansion has long been a target for many Australian companies, but the results of such ventures have often been mixed. One newcomer to such an expansion strategy is Domino’s Pizza Australia New Zealand (DMP), which earlier this year entered the European market through the purchase of 155 stores in the region, bringing its total store numbers to nearly six hundred when its Australian and New Zealand operations are included.
The company generated strong like-for-like sales growth of 4.3%, which helped it to post a profit above market expectations of $13m for FY06. Australian stores were a major contributor as they traded well, while the New Zealand operations came in at almost double the prospectus forecast.
Credit Suisse, which rates the company as Outperform, sees another 4-5 years of such strong growth from the Australia and New Zealand operations as new stores continue to be added, a view shared by ABN Amro which expects another 40 stores to be opened in the region this year.
But it is Europe where the real upside lies, this despite the expectation the operations will force earnings down to between $11.1-$11.7m this year due to one-off costs. As Credit Suisse notes, the European market is quite fragmented and so remains a growth opportunity, particularly given the size of the market overall.
The company plans a further 20 stores in the region this year, which would lift numbers to around 175, with management indicating the division is expected to turn profitable in FY08. As a result, Credit Suisse expects earnings to increase from below $12m in the current year to $14.4m in FY08, which represents earnings per share of 24c, compared to 19c in FY07. ABN Amro is even more positive in FY08, forecasting earnings per share of 27.5c, while GSJB Were is somewhere in the middle at 25.5c.
Weres has a valuation on the company of $4.30, which compares to an average price target according to the FN Arena database of $4.69 and a median price target according to Thomson One Analytics of $4.40. The database shows the stock is rated as Buy once and Hold twice.
Longer-term the broker sees the potential for its valuation to increase significantly though, estimating a level above $7.00 would be justified if the company could eventually expand its European operations to 1,000 stores, compared to its current target of 380.
It points out while the stock is currently trading on a premium to the Small Industrials sector of about 30% the share price is likely to do little in coming months, but as evidence begins to flow through over the next six to 12 months of earnings improvement in Europe there is potential for the stock to move higher.
The market is currently acting in accordance with this theory, as the stock today is unchanged at $3.85 despite yesterday’s better than expected result.