Australia | Aug 12 2011
– Domino's Pizza FY11 result better than expected
– European operations improving, impacted by forex moves
– FY12 guidance suggests more solid growth
– Brokers lift forecasts, targets and ratings
By Chris Shaw
After guiding to a 15% increase in earnings for FY11, full year net profit for Domino's Pizza ((DMP)) came in at $21.4 million. This was a 20% increase from FY10; better than most in the market had expected.
Credit Suisse notes all result metrics were good, as Domino's reported a 51% increase in cash flow, the balance sheet has strengthened to a net cash position of around $12.5 million, return on capital increased 27% and European earnings appear to be delivering solid growth.
The breakdown of same store sales (SSS) growth was also good, Credit Suisse noting for the Australian and New Zealand operations SSS rose 13.2% for the year and by 15.1% in the second half, while in Europe the increases were 5.9% in annual terms and 6.8% for the second half.
The pick-up in Europe in particular was important, as Credit Suisse expects economies of scale in this market should now be realised by Domino's. This is expected to deliver ongoing leveraged growth in coming years.
The European contribution to earnings could have been even more significant but as JP Morgan notes, much of the improvement was cancelled out by adverse forex movements and some restructuring costs. Looking ahead, JP Morgan expects new store openings in Europe will support solid growth in that market.
Further growth in the Australian and New Zealand operations is also expected, Macquarie pointing out this will come not only from additional stores but from the digital business which includes online and mobile sales, new menu items and a store refurbishment program.
Management at Domino's has guided to FY12 net profit growth of around 15%, a target seen as achievable given a strong first four weeks of FY12 trading. Domino's has also advised a target for new store openings this year of 60-70, while long-term the goal now is for 2,000 stores, up from a previous target of 1,620. This would be more than double the 866 stores in place at the end of FY11.
To reflect both the guidance offered by management and the better than expected FY11 result, brokers have lifted earnings estimates across the market. As examples, Goldman Sachs has increased its earnings per share (EPS) estimates by 6-9% for FY12-FY14, while UBS has lifted its numbers by 5-6% across the same period.
Consensus EPS estimates for Domino's according to FNArena's database now stand at 35.3c for FY12 and 39.9c for FY13. This compares to the 31c delivered in FY11. Increases to forecasts have also seen price targets move higher, the consensus target according to the database now $6.97, up from $6.65 previously.
UBS is now forecasting capitalised annual growth in EPS of 16% for FY11-FY14, which implies Domino's is offering value at current levels. As a result, UBS has upgraded to a Buy rating from Neutral previously, attracted not only to strong fundamentals but the ability to expand in a resilient category with relatively little capital outlay.
Others have reacted similarly to the result and FY12 guidance, as RBS Australia and Macquarie have also upgraded to Buy ratings from previous Hold recommendations. This means Domino's is now rated as Buy by five of the six brokers in the FNArena database to cover the stock. Goldman Sachs also rates Domino's as a Buy.
The exception to Buy ratings comes from JP Morgan, which has retained its Neutral recommendation. This is a valuation call, as while Domino's is regarded as a premium stock, JP Morgan suggests an expected FY12 earnings multiple of 15.4 times already factors in a price premium.
Over the past 12 months Domino's shares have traded in a range of $5.10 to $6.68. The current share price implies upside of around 13% to the consensus price target in the FNArena database.
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