Domino's offshore opportunities deliver growth
Despite a difficult start to the year, Australia's largest pizza chain should see decent long-term growth, according to Morningstar.
Despite a difficult start to the year, Australia's largest pizza chain should see decent long-term growth, according to Morningstar.
Substantial local and overseas growth are key contributors to this outlook from Morningstar equities analyst Johannes Faul. He notes the disappointing half-year results, but believes Domino's Pizza Enterprise (ASX: DMP) is poised to substantially increase its existing store base in Australia and across Europe.
"Despite significant growth during recent years, Domino's is by no means a mature business.
"Australia can still increase its store base by about half in the next few years, and European growth is much more substantial, with potential to increase the existing store base by around 1,300 outlets to over 2,400 outlets over the next decade," Faul says.
He points to Domino's strong franchise model as core to its success, noting that in recent years, virtually all new stores in Australia and New Zealand were opened by insiders – either existing Domino's franchisees or store manages.
"This indicates that the company's franchise model remains attractive. Franchisees who are unhappy with their franchisor don't come back for more," Faul says.
Domino's Australian sales have grown by nearly 15 per cent a year over the past five years
He also calls out the "highly fragmented" pizza market in Europe, describing it as a significant opportunity for Domino's to take market share, and praises management's ability to adapt to market trends by "refreshing the product range, including healthier ingredient and gourmet styles, and transitioning to online ordering."
Sales in Domino's Australian market have grown by nearly 15 per cent annually over the past five years, and Faul expects growth rates of around 10 per cent per annum to continue into at least 2023.
The risk horizon
Faul says macroeconomic conditions outside of Domino's control could present risks to franchisees profits. These include slowing growth in takeaway food retailing, potential tightening of lending standards to franchise following the Banking Royal Commission, and increasing competition from independent pizza stores and other fast-service restaurants.
"If credit to franchisees were to be curtailed, demand could build up, at least in the short term," Faul says. But he believes any disruptions from macroeconomic events are likely to be temporary.
The Senate inquiry into the operation and effectiveness of the Franchising Code of Conduct also presents near-term risk to the Australian segment, especially if it results in an overhaul of the domestic franchising system. However, Faul insists Domino's is on the "front foot" with its recently implemented monitoring and investigative process to address franchisees misconduct.
Domino's is currently trading slightly undervalued at current prices – last close $51.42 -- to Morningstar's fair value estimate of $53.00 per share.
More from Morningstar
• CBA demerger a positive step, says Morningstar bank analyst
• Make better investment decisions with Morningstar Premium | Free 4-week trial
Emma Rapaport is a reporter for Morningstar Australia.
© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.