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Fri 14th Jul 2017 - Update: Domino’s UK, Stonegate
Douglas Jack – ‘we’d recommend buying Domino’s shares for the long term’: Peel Hunt leisure analyst Douglas Jack has recommended buying Domimo’s UK shares for the long term. He suggested, however, that the rate of expansion of Domino’s franchisee network is a key indicator of the health of the business. He said: “For the interim results, due on 25 July, we forecast profit before tax rising by 8% to £44.2m despite assuming 0% like-for-like sales growth. From this base, the company should implement a wide range of initiatives to drive like-for-like sales and franchisee profitability from H2 2017E. We would continue to use current weakness to accumulate. We forecast UK like-for-like sales being slightly negative in Q2 largely due to the heatwave and an 11.3% comp, offsetting the benefit of better bundle deals and advertising, as well as Pizza Hut’s big promotion ending. Domino’s global website activity ranking has dropped slightly in June-July, as is normal in the quieter summer months, but it is still more than 3x that of its nearest rivals. We expect franchisee average store Ebitda to have fallen from £164k to circa £150k annualised in H1 due to a combination of slower like-for-like sales, higher wage costs (we have heard that competition for drivers is pushing up wage costs by 7-8% for some businesses), higher commodity costs and lower volume-based rebates. The key signal is “are franchisees still opening stores?” If fewer than the target 80 stores open in the UK this year, then we will assume franchisees are unhappy, as they were in 2013 when average store Ebitda was £102k and only 42 traditional stores opened. If UK expansion accelerates, we should view this as a signal that franchisees are fully supportive and invested in the model, noting that they have the best knowledge and understanding of their business, including the impact of store splits and competition (from the likes of Deliveroo). Domino’s App still has a rating of just 2/5; but App improvements, including Apple Pay, are due in Q3. The GPS tracker roll out should start in late 2017; we believe that in Australia it shaved 1.6 minutes, from 12.0 minutes, off delivery times, 1% off costs and added 4-5% to like-for-like sales. Franchisee labour scheduling is being rolled out in H2. These should ease the pressure on Domino’s sacrificing margin. Like-for-like sales should pick up in H2 against a softer (4%) comp. We are holding our full year profit before tax forecast (£94.6m; consensus £93.2m) based on like-for-like sales rising by 3% and UK margins falling by 50bps; although 2% like-for-like sales, less margin weakness and an unchanged profit before tax forecast is more likely, in our view. We would buy for the long term. We believe Domino’s model is intact, and that it can cope with competition from restaurant deliveries, whose questionable economics have contributed to an 8% fall in the supply of Chinese restaurants over the last year. Next year, we expect Domino’s cash flow to accelerate as capex slows, and for total restaurant supply to start declining. Could Domino’s become a takeover target? Despite like-for-like sales averaging 9% over the last 14 years, outperforming in downturns, its P/E is 18x. The US and Australian businesses, which operate in more saturated and equally technically advanced environments, both trade on a forward P/E of 39x.”

Mike Wood elected chairman of All Party Parliamentary Beer Group: Mike Wood MP has been elected chairman of the All-Party Parliamentary Beer Group at the Inaugural Meeting of the group in the new Parliament. The previous chairman, Graham Evans lost his seat in the recent General Election. Mike joined the Beer Group after he was elected as MP for Dudley South in the 2015 General Election. His Dudley constituency is home to 75 pubs and four breweries – Bathams, Black Country Ales, Ma Pardoes and the Pig Iron Brewery. Wood said: “The Beer Group is the largest All-Party Group in Parliament and this reflects the enormous importance of beer and pubs to the UK economy and our communities. There is tremendous goodwill for the sector amongst MPs and I want to harness this to ensure that it is allowed to flourish. UK beer duty is too high and pubs pay a disproportionately high level of business rates. This is bad for brewers, pub operators and beer lovers. But it is also bad for government, as the industry employs a million people and is a vast contributor to Treasury tax receipts. There is a real danger that by imposing such high levels of tax they risk killing the goose that lays the golden egg. Over the next few months I am looking forward to meeting as many people from the sector to explore how we can work together to get a fair deal for Britain’s beer lovers and pub goers.”

Stonegate chairman Ian Payne commits to more investment in pub sector: Stonegate Pub Company chairman Ian Payne has congratulated the government on appointing a pubs minister after his call to urgently confirm an appointment last Wednesday during the relaunch of the company’s flagship venue. Hosting a VIP reception including seventy MPs on board Thames floating pub ‘Tattershall Castle’ after a multi-million pound refurbishment and move towards Westminster, Payne iterated the significant contribution of the pub sector to the economy. “The pub and eating out sector directly employs 1.5 million people and provides indirect employment to a host of suppliers, contractors and ancillary services. We need to work hard to make the government understand just how important we are to the wider UK economy.” Stonegate has already invested £27.1 million in its first three quarters to June, further acquiring 50 pubs, including the purchase of Intertain and its Walkabout brand, and now employs almost 14,000 people. The ‘Tattershall Castle’ was purchased in 2015 when it took over TCG and has become one of the company’s flagships, with a 1,000 capacity and multiple venue space for both private hire and public use. Stonegate has invested 500k since the boat moved to a mooring closer to the Houses of Parliament. Payne added: “Given the appropriate support from the government we will continue to make investments of this magnitude across the UK.” Stonegate Pub Company is the largest privately held managed pub operator in the UK, with revenues in excess of £625 million, employing circa 14,000 people. The company has 692 pubs, split into two divisions, Branded, comprising: Slug & Lettuce, Yates, Walkabout, Common Room and Venues; and Traditional comprising: Proper Pubs, Town Pub & Kitchen, Classic Inns.

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