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A marmite topping would accurately reflect current investment opinion on the shares
Thursday 23 Dec 2021 Author: Martin Gamble

The long running power struggle between the UK and Ireland franchise owner of food delivery chain Domino’s Pizza (DOM) and its franchisees has finally been resolved, at least for now.

Shares in Domino’s surged 22% on 16 December on the news it had reached a resolution with franchisees, partly because it removes risks for shareholders, but mainly because it implies greater earnings growth prospects.

The company presented the three-year deal as a win-win outcome, arguing that both parties were better positioned to drive higher system sales and profit over the medium term.

Franchisees had refrained from participating in national promotional deals during a long-running dispute and a new commitment to participate is expected to be a key driver for volume growth going forward.

Domino’s now expects to achieve system sales at the upper end of its previously announced range of between £1.6 billion to £1.9 billion, and to exceed its target of opening 200 new stores.

Under the agreement franchisees have committed to stepping up the pace of new store openings from 30 to 45 a year over the next
three years.

Judging by the share price reaction, the deal was well received, but not all analysts were as positive as the share price move suggested.

For instance, Jefferies argued that ongoing cost pressures faced by franchisees and the short-term nature of the agreement means the company could be back to square one in three years’ time.

Liberum analyst Wayne Brown seemed to concur, saying the issue will ‘rear its head again’ because the underlying concerns of the franchisees have not been fully addressed.

Brown goes on to suggest current management will likely move on after they have earned their incentives and leave the problem to be solved by the next management as ‘the history of Domino’s suggests to us’.

Richard Stuber at Numis was more positive, pointing out some investors were sceptical that a resolution could be achieved without a ‘profit reset’ and therefore the latest deal unlocks the potential for the shares to trade on a higher multiple of earnings.

At 435p, the London-listed Domino’s currently trades on 20 times forecast earnings for 2022, compared with the Australian Domino’s franchise owner which trades on 45 times next year’s earnings, and the US franchise owner which is on 34-times.

Stuber argues that if the UK and Ireland-focused Domino’s achieves £1.9 billion in system sales in 2025 it would be equivalent to a compound annual growth rate of 8% a year, implying pre-tax profit of £163 million. That is 45% higher than the £112 million pre-tax profit which Domino’s is forecast to achieve in 2021.

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