Douglas Jack – Domino’s is dominating growth in UK pizza market

Issuing a ‘Buy’ note on the shares with a target price of 425p, Jack said: “Domino’s is dominating growth in the UK pizza delivery market, having grown UK system sales by 8.6% (6.5% volume; 1.9% average order value in 2017).

 

The market should continue to grow, reflecting 10% growth in household numbers over the next ten years (5.5% growth in urban population), improving home entertainment, and value for money (benefiting from off-trade drink prices) and convenience.

 

Domino’s average spend per head is £7 (including collection orders), which compares favourably to an £18.43 average spend per head in restaurants in 2017 (source: MCA, based on the top 25 restaurant brands).

 

It is worth noting although Domino’s headline prices may appear high, 87% of UK orders in 2017 were on promotion, with an average discount of 38%.

 

The efficiency benefits of GPS tracker and territory splits are greater than we expected.

 

Domino’s cited a case where labour costs are 760 basis points lower as a percentage of sales as a consequence of collection being 51% of sales versus the company average of 21.4%.

 

GPS tracker is also reducing labour costs, delivery times and motor insurance costs.

 

Although we forecast £250m to be returned to shareholders over the next three years (via dividends and share buy backs), we forecast almost no change in net debt/Ebitda over this period.

 

This reflects the company’s substantial cash flow characteristics, which should support the company’s valuation.

 

In our view, the 2018E price-to-earnings ratio rating should grow from 20 times towards the 24 times historical average, reflecting strong like-for-like sales, expansion, material efficiency benefits, upgrade risk and overseas operations now becoming profitable for the first time.

 

Like-for-like sales remain a key share price driver, and we believe there is upside to our/consensus’ assumption of like-for-like sales (pre- splits) rising by 3%, particularly in H1 2018E, when comparables are very soft.”