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Tue 8th Dec 2015 - Domino's Pizza Poland and Vianet
Nick Batram – ‘we were impressed by progress at Domino’s Poland on site visit’: Peel Hunt leisure analyst Nick Batram has reported being impressed by progress at Domino’s Poland during a site visit to Warsaw. He said: “A site visit to Warsaw confirmed the encouraging progress reported by the Group over the past 18 months. Highly motivated and talented sub-franchisees, supported by a new modern commissary, give us confidence that DPP will establish a sizable presence in the Polish market. At this point we expect the business to be worth materially more than the £33m valuation today. We recently visited Warsaw to see a number of the Group’s stores, meet sub-franchisees and view the new commissary operation. The contrast with our last visit in 2012 is that we saw a management team with significant confidence that they now have the right model, a much better understanding of the optimum store location, a modern and impressive commissary and a platform of highly motivated and talented sub-franchisees. It was also notable that in a number of locations, local competitors had closed since Domino’s arrival. The amount of construction and investment in Warsaw also bodes well in terms of the long-term potential size of the store estate in the capital. There is clearly some way to go in establishing Domino’s Pizza as a proven and established business of scale in Poland, but in our opinion that day is much closer than it was 18 months ago and the risk profile has substantially improved. On our trip we saw a mix of corporate and sub-franchised stores, in both the old S1 format (typically 110-130 sq m) and the new S2 format (85-100 sqm). The smaller format stores save space by having less in-store seating, this differentiates Domino’s Pizza in Poland from much of the competition. In our opinion, this also reflects a growing confidence in the proposition. We also noticed that several competitor stores had closed since our last visit. The Group recently expanded into its third city, Wroclaw and we expect at least two further cities in 2016. In terms of number of stores, as expected 2015 is very back-end loaded. There are 21 currently open and while our estimate of 27 might not be achieved by the end of December, we expect the Group to be there or thereabouts by the end of January. Sub-franchisees: We met with both RHPP (five stores + option to acquire a sixth) and HLM (two existing and one about to open). Both sub-franchisees groups are run by previous DPP managers who clearly have a passion and strong understanding of the business. It is also clear they have significant appetite for further stores in due course. What impressed us was the level of entrepreneurial flare and as an example one of the franchisees has been particularly successful developing relationships with local businesses, with a record order of 300 pizzas from one such client! The new commissary was particularly impressive, especially as it cost only £300,000. It is a substantial improvement on the original commissary which was operated within a Do & Co facility, previously LOT catering, and used outsourced staff. The new commissary is in a modern building, with a highly efficient purpose built interior. All staff (eight full-time) are employed by DPP. As well as achieving substantially improved labour and production, delivery logistics are also far more efficient and flexible. Overall this was an impressive modern facility. Management believe the site as is can support up to 50 stores. The one pinch point in the business is labour, with a tight market in Warsaw. It is therefore likely that the next infrastructure expansion will be outside of the capital. Recent results have shown growing momentum in the business and this was definitely the impression we got seeing the stores and the commissary in operation. The evolution in the business and management since our last visit in 2012 is marked. There is real confidence that the store model has been perfected and the strength of the openings outside Warsaw suggests the brand recognition is spreading at a faster rate than we had expected. With just 21 stores DP Poland is still someway from becoming a fully established national brand/chain, but the progress is highly encouraging. The business may not be profitable at the Ebitda level until 2018 but the momentum should be sufficient to drive continued outperformance. Our view is that an established national Domino’s Pizza master franchise, should ultimately be worth a multiple of the current market capitalisation.”

Vianet reports turnover growth: Vianet Group, the provider of real time monitoring systems and data management services for the leisure, vending and forecourt services sectors, sales up 7.7% to £9.84m in its first half ended 30 September 2015. Operating profit before amortisation, share based payments and exceptional items up 15.1% to £1.75 million (H1 2015: £1.52 million). The company renewed five-year contracts with Punch Taverns, Trust inns and Heineken’s Star Pubs & Bars. It has agreed to sell Fuel Solutions to Wayne Fueling Systems for £3.5m. James Dickson, chairman of Vianet Group, said: “I am pleased that our interim results demonstrate the resilience of our core Leisure division with the benefits of new iDraught orders and cost savings offsetting the impact of pub closures. Looking forward, we have achieved some important contract extensions and new wins with key customers in both Leisure and Vending, where coffee telemetry and contactless payment solutions continue to drive growth. The sale of our Fuel Solutions division announced today will release both cash and management energy to develop our growth strategies in both Leisure and Vending still further.” Of prospects in the pub sector, he said: “The board is confident that further new sales in iDraught and vending solutions will deliver continued growth, despite the fact that Vianet may continue to be influenced by the challenges faced by the UK pub sector. Whilst M&A activity in the pub sector may also have a short term dampening effect on new iDraught volumes, the rate of pub closures is diminishing and the outlook for the core Leisure division is improving as significant contract extensions with key customers and the benefit of cost initiatives come through.”

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