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Morning Briefing for pub, restaurant and food wervice operators

Tue 21st Jul 2015 - Update: Domino's Pizza, SSP Group, NewRiver Retail
Douglas Jack – we expect another strong trading update from Domino’s: Numis Securities leisure analyst Douglas Jack has forecast “a strong update” at Domino’s Pizza when it reports interim results next Tuesday (28 July). Issuing a ‘Buy’ recommendation and a 985p target price for its shares, he said: “We forecast profit before tax being up 26% to £31m (or up 14%, excluding £2.3m of one-off losses in H1 2014), driven by expansion and strong like-for-like sales growth in the UK, and cost reduction in Germany. We believe the company’s growth prospects are significant, and are undervalued relative to those of the US and Australian companies. UK like-for-like sales rose 9.5% in January-February (versus a 14.6% comp). Even though the H1 comp is 11.3%, we would not be surprised if like-for-like sales have remained close to 10%, aided by strong growth in digital sales (to c.80% of delivered sales), which attract larger, bundled orders. With 8.2m App downloads as at December 2014, we expect at least half of online sales to be via mobile devices. UK franchisees’ profits/store rose 26% to £129k in 2014. In 2015E, they should benefit from additional like-for-like sales growth and gain a further 7% (£9k/store) boost from food cost savings, by our estimates. This supports a virtuous circle of: additional local store marketing (up 11% in 2014); faster expansion; higher total sales and national advertising; leading to additional like-for-like sales. Given this, franchisees should be able to accommodate the National Living Wage better than its peers. We forecast 58 openings in 2015E (UK 50; Germany three; Switzerland four; and Republic of Ireland one) versus 44 (UK 40; Germany three; and Switzerland one) in 2014. Reasons to believe the 1,200 store target for the UK could be extended include like-for-like sales being strong not only in the UK, but also in countries that are seven to ten years more mature than the UK in stores per capita (like-for-like sales are 12.8% in the US and 10.6% in Australia). We expect Switzerland to break even and German losses to fall further. German losses fell from £4.7m in H1 2014 to £2.6m in H2 2014 due to improved operational and central efficiency, even though like-for-like sales fell 8% in H2 2014. Like-for-like sales were flat in Germany and up 7.7% in Switzerland in January-February 2015. We believe there is upside to our 2015E forecast, which assumes just 3% like-for-like sales growth and falling gross margins for the UK. Given this, a net cash position, zero net rent, minimal capex, and a high digital orientation (at c.80% of sales; the US/Australia are at c.50%), we believe the shares are undervalued (on 26x P/E), particularly in comparison to Domino’s US (P/E: 32x) and Australia (P/E: 56x).”

SSP Group reports like-for-likes up 3.2% in Third Quarter: Transport hub specialist SSP Group has reported total group revenues for the period from 1 April 2015 to 30 June 2015 increased by 4.1%, with like-for-like sales growth of 3.2%, compared with the same period last year. At actual currency rates, given the strengthening of sterling against major European currencies compared with the prior year, total Group revenues decreased by 0.1% year-on-year. The company stated: “Like-for-like sales in the third quarter continued to benefit from good growth in the UK, benefiting from strong passenger growth in the air sector, and in North America, driven by the performance of Terminal 4 at New York JFK airport (where additional Delta passengers were transferred into the terminal). The Rest of the World division (which includes Eastern Europe, Middle East and Asia Pacific) also delivered healthy like-for-like sales growth, and is seeing similarly strong trends in passenger numbers across most of the region. In Continental Europe, we continued to experience a more challenging trading environment, notably in France and Germany. Net gains were 0.9%, which was stronger than in the first half, as we indicated at our interim results. Trading results from our overseas operations are converted at average foreign exchange rates over the year. In comparison with last year, Sterling has strengthened against many of our key currencies (including the Euro, Norwegian Krone and the Swedish Krona). Currency movements have a translation impact only. If foreign exchange rates remain unchanged for the rest of the Group’s 2015 financial year, total Group revenue growth for the 2015 financial year on an actual currency basis would be approximately 4% lower than on a constant currency basis. For the nine month period from 1 October 2014 to 30 June 2015, total Group revenues increased by 3.1% on a constant currency basis, with like-for-like sales growth of 3.1%, compared with the same period last year. At actual currency rates, given the strengthening of Sterling compared with the prior year, total Group revenues over the same period decreased by 0.5% year-on-year.”

NewRiver Retail completes acquisition of Marston’s portfolio: Property developer NewRiver Retail has completed three strategic acquisitions totalling £121 million marking the deployment of the majority of the £150 million raised in the company’s recent equity fund raise. The acquisitions are: The Ramsay Retail Warehouse Portfolio for a total consideration of £69.1 million, equating to a net initial yield of 8.0%. on the income producing assets. The geographically diverse portfolio has been acquired from a major foodstore operator and comprises 13 assets and includes nine value-led retail parks and four development sites each with approved planning consents and pre-let interest from retailers; The £29 million acquisition from LVS, a subsidiary of Bravo II, for the acquisition of the 50% stake not already owned by NewRiver in the Trent JPUT – the Marston’s public house portfolio of 202 pubs – at an implied net initial yield of 10.1% bringing the portfolio 100%. under NewRiver’s ownership; The £23 million acquisition from LVS, a subsidiary of Bravo II, of the 50% stake not already owned by NewRiver, in the Camel III JPUT – a portfolio of five shopping centres reflecting an implied net initial yield of 7.2% bringing the portfolio 100% under NewRiver’s ownership. The three acquisitions, together with planned capital expenditure for identified risk-controlled development opportunities, will effectively deploy the £150 million raised in the placing of new shares as announced on 19 June 2015. David Lockhart, chief executive at NewRiver Retail, said: “We are delighted to have completed these three major acquisitions totalling £121 million, effectively deploying the £150 million equity capital raised which completed last week. Following the completion of these acquisitions our assets under management now total £918 million, the vast majority of which are on our own balance sheet.”

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