Domino's Pizza pressured to keep up with 'intense' NZ race

Despite its profits hitting A$14.5m.

According to J.P. Morgan Chase & Co.'s research report dated February 13, 2013, it believes that Domino’s Pizza Enterprises 1H13 result to be questionable with regard to the quality of guidance, as SSS growth was revised down while store count and net capex was revised up. This means that the company needs to invest in more stores for the same level of growth.

J.P. Morgan also pointed out that Domino's Pizza needs to address the key issues that have weakened their ANZ SSS growth, specifically the intense domestic competition in New Zealand, and the glitch experienced in their digital platform, which temporarily impacted trading for 8 weeks.

However, with the brand’s expansion to Europe, J.P. Morgan is seeing this as a strong growth potential and expects the company’s EBITDA margins to rise.

Here’s more:

DMP reported 1H13 EBITDA of A$26.5m and NPAT of A$14.5m, both up 15% on the pcp, but in line with FY13 guidance. SSS growth was 1.5%, cycling a high 8.4% in the pcp but below our 2.3% estimate.

Guidance reiterated but Quality Questionable. DMP reiterated guidance for EBITDA and NPAT growth of ~15% but also revised down SSS growth guidance (3-5% to 2-3%) and increased guidance for new store openings (70-80 to 80+) and net capex (A$15-20m to A$30-35m). Guidance also now includes the contribution from an acquisition of 15 stores from a franchisee. This means DMP needs to invest in more stores for the same level of earnings growth.

Downgrade to Neutral, lacking valuation support. Our DCF factors in ongoing SSS growth of 3% for ANZ and 8% for Europe as well as EBITDA margin increases to 30% for ANZ and 11% for Europe by FY17. Notwithstanding this we struggle to get a valuation above A$10. DMP is also trading on a premium to global peers including Domino’s UK and Domino’s US (23x vs. an average of 21x).