Domino's' shares rise after results delivered

Shares in Domino's (DOM) jumped 9 per cent on the morning of its results as investors digested the numbers. The pizza delivery company posted a 20 per cent bump in revenue while pre-tax profit surged 80 per cent thanks to the £40.6mn it made selling its German associate. It plans to use that cash to start a £70mn share buyback programme after the current £20mn program has completed.

However, underlying pre-tax profit growth, which removes the profit from that sale, is flat. The company blamed this on higher interest costs following debt refinancing. “Net underlying finance costs in the period were £7.6m, an increase of £3.7m,” it said, adding that a higher fixed rate of 4.26 per cent for some of its debt and a higher variable rate on other debt was the reason for the increase.

Despite these costs, Domino’s balance sheet has improved. At the start of the pandemic, we warned investors about the steady increase in Domino’s net debt especially considering its negative shareholder funds. Net debt doubled from then to £466mn by the end of last year, but in its most recent results it has started to reduce that debt pile. 

It booked a £6.7mn net increase in cash holdings over the period, bringing the balance of its coffers up to £37mn, with analyst Liberium forecasting it can increase that number to £120mn by the end of 2025 thanks to a steady increase in revenue and underlying profits. Liberium still considers the shares overvalued, although it has increased its target price from 300p to 360p. 

We are similarly sceptical. While there are slices of good news here, we would need to see more evidence of recovery before upping our rating. Hold.

Last IC View: Hold, 329p, 26 Jul 2023