Domino's raises targets

The future looks brighter – or perhaps cheesier – for Domino’s Pizza (DOM) after December’s resolution of the long-running dispute with franchisees over profit sharing. The full-year results buttress that good news, with revenue and pre-tax profit each climbing by more than 10 per cent and the dividend raised.

The deal with franchisees is material for the business. There will be £20mn of capital investment and new marketing investment on the company side, and a commitment on the franchisee side for more store openings – at least 45 new stores are expected over each of the next three years. Domino’s medium-term targets have been raised on the back of the deal – over 200 new stores and system sales approaching £1.9bn are now considered achievable.

The other part of the story here is the new growth strategy that was unveiled last March. This is based around five “growth pillars”, including delivery – a new app was launched in the year – and driving efficiencies in supply chains. The strategy is paying dividends, literally and metaphorically. The company generated over £100mn of free cash flow in the year, has raised the full-year dividend, invested £14mn in capital projects, and announced a new £46mn share buyback programme on top of the £80mn completed in the year. A list not to be sniffed at.

Numis analysts said of the company that “investors overlook how defensive its earnings are”. The shares are trading on a consensus 17 times forward earnings, which looks undervalued given a solid year and growth prospects. It has been a topsy-turvy couple of months for the dough-roller’s shares, but we think it’s time for an upgrade. Buy.

Last IC View: Hold, 439p, 3 Aug 2021