Domino’s wins back some support

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Pizza maker Domino’s outlined several operational improvements and technology developments at an investor briefing last week, including a trial of pizza delivery by drone. Morningstar liked what it heard and recommended that investors ‘accumulate’ the stock.

It’s a big call. After a big run up over the past few years Domino’s share price has come back to earth over the past year and has been caught up in controversy.

The stock crept up from $2.50 to $12 a share between 2009 and 2013. Then it took off, reaching a peak of $75.80 in August last year.

It fell back to $43 in September this year but over the past month has regained some of the lost ground. At the close of trading on Friday the stock was $49.53. Its one-month return is 22 per cent.

The company missed earnings guidance when it announced its 2016/17 results and flagged relatively weak earnings growth for 2017/18.

Earnings per share grew 20.1 per cent in 2016/17, down from 46.2 per cent the previous year and 35 per cent in 2014/15

Return on equity was ROE 29.7 per cent, up from 24.1 per cent in 2015/16 and the highest in four years.

Domino’s Pizza Enterprises holds the master franchise agreement for the Domino’s Pizza brand in Australia, New Zealand, Japan, France, Belgium and the Netherlands. Australia is the fourth largest market for Domino’s, after the United States, the United Kingdom and Mexico.

Morningstar says Domino’s can increase its Australian store base by 40 per cent over the next few years and European growth prospects are “substantial”.

It rates the company “a leader in restaurant logistics and technology tools.” About 50 per cent of global sales are sourced from digital channels. In Australia more than half of these sales come from its mobile app.

Morningstar says: “The briefing reinforced our view that Domino’s still has ample opportunity to drive revenue and franchisee earnings in Australia. In the near term we see upside by increasing average productivity of franchisees with new business analysis and rostering systems.

“We expect these the introduction of these systems to underpin same-store sales growth and EBITDA margin growth, which we estimate will increase from 35 per cent currently to 40 per cent by 2023.”

Morningstar has a fair value estimate of $53 on the stock.

Domino’s has industrial relations problems to deal with. Earlier this year Fairfax Media reported wage fraud in the franchise network and a business model that encouraged franchisees to cut corners, such as underpaying workers. Domino’s has denied the claims.

Next month the Fair Work Commission will conduct a hearing into enterprise agreements at Domino’s. The Retail and Fast Food Workers Union is pushing for the current agreements to be terminated and replaced by a “modern award”, which would increase pay for Domino’s workers, including the introduction of penalty rates.

Estimates of the likely increase vary from $10 million to $30 million.

Macquarie Securities does not share Morningstar’s enthusiasm for the stock. It has a ‘neutral’ recommendation on Domino’s.

Macquarie says growth remains strong across the business based on management guidance of 20 per cent net profit growth in 2017/18.

“However, there has been a slowdown in sales momentum, with weaker than expected 2016/17 results were a function of softening comparable store sales growth across all regions. This is a concern,” it says.



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