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Pleasure goodflyingduck!
I would imagine it would be to do with local market conditions i.e. above all the level of average local disposal incomes (which will determine the ability to order take aways more or less frequently), population density in the catchment area, the presence of other delivery services, the drive of the individual store manager, local brand recognition (so Domino's is now a very familiar brand in Warsaw but less so outside), etc. That said, in the case of DPP I don't believe I have read anywhere (either from them or in the research) that the company is experiencing a massive delta in mature store profitability. It's just that there is a multi-year path for any given store to reach mature profitability. And DPP is suffering above all from the fact that its percentage of older mature stores is still vastly outnumbered by the percentage of newer immature ones. And this will continue to be the case for some years yet as it scales up the estate.
Now it may be that the length of time to get to maturity differs depending on location. So I would imagine (and I'm speculating) that it can happen faster in a dense, wealthy Tier 1 urban area (Warsaw, Krakow, Tri City) than in a smaller Tier 2 town for all the reasons outlined above. These also by definition have the potential to support a greater number of stores.
Above all I think comfort should be taken from the fact that none of the realities outlined above are any different for Domino's (and have been overcome) in its other operating countries. So in it's other emerging market Domino's has over 5 stores per million of population. In the likes of the UK and Holland it is over 13. The equivalent for DPP right now is 1.5. Hence why management is so confident that getting to the initial target of 150 stores, which would only bring that figure to 4, is so doable. And the long term potential could be 400+ stores (so 10 per million per pop).
Hi goodflyingduck. Re. your 2 questions:
1. Weather - I think the point here is that (unlike say Pizza Hut) Domino's have no real in store service except for a few basic tables and chairs for the relatively small amount of walk-in customers who want to consume on site. This obviously means they can be in secondary locations and save significantly on staff overheads. But the flip side is that it leaves them more likely to lose out in the warmer months when people prefer to gather with friends at the more traditional smaller restaurants / cafes (with outdoor seating) (which includes local mom&pop pizzerias) that are so common in Central Europe. In addition people are more likely to invite friends over for a BBQ, go for a picnic, etc, etc. The Domino's model excels when the weather is poor and customers can't be bothered to lift their proverbial backsides off the sofa. All they want to do is veg out with a pizza in front of a movie / sporting event. To the extent climate change progresses it could be a long term factor. However, it's climate change and not global warming. Temps could just as well go down locally as up. And I would also set this against rising incomes and changing eating habits, which are likely to continue to provide a tail wind so long as we are not facing complete economic climate related catastrophe. For the purposes of DPP's near term future I would rate this chance as minimal. In addition whatever happens to temps the sun will continue to set much earlier in winter when a night in will continue to be more appealing for many people.
2. Share of Voice - I take this to be the marketing noise with which customers are bombarded. Those companies with deeper pockets can drown out smaller competitors. With only 62 restaurants at present there is only so much DPP can spend in any given quarter. And the impact is made worse to the extent competitors such as the aggregators are chucking free money at punters in the form of large discounts. Think of the impact of Deliveroo in the UK market. Personally I seriously question the long term viability of such business models. Deliveroo, for example, has never made a profit and is unlikely to any time soon. But if you chuck free money at punters they will take it...
So in conclusion we do have seasonality in the business which seems to be exacerbated by unseasonal temperatures. And the aggregators have definitely had a near term impact. As the estate builds in scale the business will be much better positioned to blunt the impact with increased marketing spend (as was demonstrated so effectively with the TV ad trial) of its own. Moreover, I question whether the aggregator models are LT sustainable in any case
Great post Peterson.
With the SP at a 3 and a half year low this is a good buying opportunity for a growing company.
Yes, the growth rate may stall a little over the next 12 months but the business plan of having profitable 150 stores is still intact.
In case anyone hasn't seen this is worth a watch:
https://www.proactiveinvestors.co.uk/companies/stocktube/11607/dp-poland-take-away-tasty-figures-from-2018-11607.html
My personal take is that whilst the latest road bump is super frustrating management are doing the right thing in terms of managing growth and profitability. It's not at all clear that the current high level of ad spend by the aggregators is sustainable. It's a long term game so sometimes it's better to hunker down. I absolutely disagree with the contention that Poland is somehow different from other markets in terms of eating habits. Whilst it is true that traditionally Poles did little eating / ordering out this is steadily changing with rising disposable incomes, longer working hours / commutes and a younger generation that is less willing to spend endless hours in the kitchen and aspires to a more "Western" lifestyle. And you can see that in the historic growth of the home delivery market. On the other hand Poles are highly cost conscious and the market is highly competitive / entrepreneurial.
So it comes down to your take on whether the Domino's model, which has ultimately thrived in countless other markets (both developed and emerging) will validate in Poland too. My personal view is that Domino's has a sufficiently differentiated model (for all the reasons that are well known) that it will. And the strongest evidence is for this is the performance of the oldest stores. As ADrunkenMarcus says below, the most mature stores are performing north of £80K EBITDA. Assuming the current estate of 62 stores can settle around this figure would imply an attractive forward valuation on the current estate alone. And that's excluding the potential of further growing the estate with the associated benefits in marketing / commissary synergies.
The kicker is of course that the costs of the immature estate and growth capex need to be funded in the interim. And as I have argued before the combination of a small, illiquid AIM share, pre-cash flow breakeven status and a fixation on ST results are not a happy mix, in fact a recipe for mega volatility. Consider that by management's admission break-even has been pushed back by 1 year. Lets call it a delta of £2m of additional negative cash flow. Since its 52 week high DPP's market cap is down by £45m! Now in hindsight the market was clearly ahead of itself. Perhaps a small additional equity tap will be necessary. But investors seems to be anticipating a complete capitulation / fire sale. All I can say is that the current value (under £0.3m per store) discounts a heck of a lot of bad news and (IMHO) is now a Strong Buy at this level for those with a long term view. That view of a profitable estate of at least 150 stores remains intact.
I understand the point about healthy eating and cooking for the week ahead. Mrs Methuselah likes to cook and we eat very heahily. But we are quite old. I don't think this company is trying to sell to us. It's more the youngsters they are after. Although old now, I do remember my youthful eating habits, pizzas, Chinese, curries etc.
This is a typical knee-jerk reaction of an AIM share !
DPP had already steadily climbed down from 50p+ and i wish i'd swapped even more for DPEU when they were below 90p now. We live & learn :o
I don't think that's the case, goodflyingduck. The oldest DPP stores are outperforming original expectations of £80,000 EBITDA annually. A number of fast food brands are active and successful in Poland.
I came in at 49p, the foolishness of a novice I guess, and now sitting on an a massive loss. I expected the price to go up and down, I'm not that naive, but I didn't expect it to fall on it's arse. It was the worst decision I've ever made buying this share, I've put an equal amount into P2P and making a steady 5%, no problems. You live and learn.
I have a large holding (however anyone might define it IMHO) and my average price is in the mid teens. They stated that 2018 EBITDA will be as expected. Top line sales in 2019 will be slower but there are many current stores which are immature and losses should still narrow significantly on a long term view. The estimates I have seen from Hardman for 2020 were for revenues of £23.6 million, store EBITDA of £2.7 million and group EBITDA of £0.45 million. It's not beyond possibility that DP Poland as a group will be earning a few million a year in the early to mid 2020s. The market cap is now £25 million or so, which would translate to a forward P/E of 10 if we assumed £2.5 million a year profit in 2023-24 (only five years away).
If DPP were to 'fail', I would think the UK Dominos or the Australian one might like to merge/takeover. Some further dilution may be a risk, but DPP is suffering from developing from scratch on the public market. The underlying business continues to make market share gains in a growing market.
Couldn't agree more - three sell-offs in the last month have caused the sp to almost halve.
I've taken the opportunity to increase my holding and average down significantly.
I believe the brand has significant value in winning market share and see Poland following UK and richer European neighbours in developing growing habit for take-away pizza.
With current size of operation the sunk costs can be shared more easily, so focus on profitability is good for shareholders. I think this will revert on results announcement and sentiment changes
Time to bargain hunt.
Page 50 on 2017 accounts highlighs FX exposure to Zloty on monetary assets where currency translation effect goes through profit and loss account A 20% appreciation in Sterling was worth £131,215 Exposure would increased as Polish operations have now increased Call a hedge against a large drop in sterling
If that's the case, Theanalyzer, then I think we need to factor it in as it will provide a nice tailwind for those of us based in the UK.
I suspect Zloty will strengthen against Sterling and I think that currency risk is unhedged because revenues are expenses of operating entity are Zloty based. Only head office cost are GBP based.
We have to bear in mind that Hardman & Co produce their research for client companies, but the arguments they make in their report seem very compelling to me and many of their assumptions seem conservative. I think they have had access to data from the company which has helped inform their analysis.
I agree with what you said Peterson and I thought their cash position as at 30 June 2018 was better than I had feared, despite the softer sales growth. If we take like for likes adjusted for splits then it's still very strong like for like growth. Encouragingly, the original stores from 2011-12 still seem to be growing and generating good EBITDA and I agree with you highlighting this Theanalyzer.
I did like seeing the EBITDA estimates up to 2020. It seems the group will be EBITDA positive in 2020 and then real net profits are anticipated for 2021. I take the point that they have been building a business, expanding capacity and rolling it out and this all takes time. My perspective is informed, in part, by the huge number of shares I bought in the low teens and so I am up very strongly and feel there is much more to come long term.
One aspect which does not receive much attention is currency? If we assume Poland will continue to grow and converge with Western European GDP per capita over time, then surely its currency may strengthen vs. the Pound? How would this translate into profits repatriated to DPP? Positively, one would think. I wonder what hedging arrangements they have.
For me ability to attract franchisees to reduce cash burn of opening costs and initial losses could be an important factor in whether DPP needs to raise more cash before reaching scale.
Cash flow will also depend on repayment of franchise loans.
The most positive aspect for me was continued growth and strength of top ten stores.
You beat me to it! Very thoughtful / balanced overview of the DPP investment case
Interims confirm continued progress despite some hot weather related revenue softness...
Crucially cash flow burn appears to be under control
Well worth a read!
http://hardmanandco.com/docs/default-source/company-docs/dp-poland-plc-documents/18.09.18-fully-proven-model-rolls.pdf
ADrunkenMarcus
I couldn't agree with you more and have the same "long term hold" philosophy on this one. Publicly listed, immature, negative cash flow companies are a relative rarity, particularly outside of the commodities sector, and I think something the market / investors really struggle with. Arguably DPP would be much better served off market at this early stage in its development. That said, I for one am really glad it isn't, as it gives smaller private shareholders the chance to get on board before the outsized gains have been made by the usual VCs / PEs. The downside is that it makes more for a very volatile ride on the way, as patience is the one commodity that is always in short supply. Add in some nervousness around EM (I would argue Poland isn't but who knows what investors think), potential erroneous read across from headwinds at DOM UK (which is obviously at a completely different stage in its development and arguably being mismanaged - but that's another debate) and you have the perfect background for SP weakness / volatility. It will be interesting to see if the Interims are enough to break the recent trend...
Peterson
I think liquidity is a key point. There is a tendency for movements, up or down, to be exaggerated. The share price has swung wildly recently, with no regulatory news released. I have a huge holding. For me, DPP has always been 'over priced' for whatever its current stage of development was; I view as a very long term hold and see exciting potential if they can get to over 300 stores in Poland. The current estate is over 60 stores and yet a huge proportion are still loss-making or immature. I think the market got over-excited in 2016-17 and its then undershot!
Cheers.
Pageant feature in a number of deals buying and selling stakes in listed entities.
Pageant make a big gain on Datalex according to press articles.
Comfortable having active investor on board.
Not much out on them in the public domain. Pageant is the investment vehicle of Irish businessman Nick Furlong. There is an article from September '17 re. his c. 10% investment (via Pageant) in Providence Resources, with the associated commentary that they seek "value out of out of favour stocks and sectors". Just to clarify that they have not gone from 0% to 10% in one go. RNS from April '18 confirmed a previous move above 9%. But obviously positive that they see value at this level and are continuing to creep.
Would add that I agree the current share price seems strange / disappointing in the context of recent progress. But surely much is a factor of the limited liquidity. SP is down 1.5% today on the back of 5000 odd shares traded i.e. c. £1K. So one impatient private punter has caused a 1.5% drop. The flip side is that this paves the way for a fast and sharp re-rating once sentiment improves.
Agree with the comments below that hopefully the Interims will provide further reassurance as regards store maturity / dilution / progress to cash flow break even.
I would love to add more at these levels but am at my limit for commitment to a single stock
What's Pageant's record in terms of the returns they have achieved? Do we know? (Just curious).
Correction back over 50p not 80p, got mixed up with SQZ
This is looking good, Pagent wouldn’t take zero to 10% if any dilution in sight. The role out is solid BEP on the way I think. Could and probably should be getting back to 80p when it’s was a minnow. Anyway 40p would be nice and very aceivable. Roll on the 18th September