Member Info for Peterson

Can one of the LT holders explain this share to me. I'm clearly missing something. And I'm not trying to be provocative for the sake of it. Nick Train who I greatly admire holds this. But a steadily falling sub-10% ROCE, which this year hit less than 6%. A yield of barely over 1%. Operating Profit that has gone nowhere in 2 years (up c. £2m), whilst net debt has increased by £50m over the same period. And trading on an EV/EBITDA multiple not much less than something like AG Barr that has ROCE in the mid-teens. And you have no hedge against falling GBP / Brexit / Corbyn, etc. Although I appreciate that you are also aligned on costs so no FX risk. But still the share is up some 500p from its lows. Why on earth? What is the magic here? Why would you hold this forever vs. a Diageo which gives global exposure and has far superior ROCE. Again. This is not meant to insult. I really don't get the attraction and the related rating

Similar sentiment to others. A 20% pop is always nice. And obviously much more when compared to the 52W low. But it always felt like the latter was completely unjustified and commercially they were just getting into their stride, even if margin pressure was always worry. I guess with Sagi on board the odds of an Earthport type bidding fenzy is low. But one never knows. Perhaps someone else has their eye on it too. Payments is so hot right now and assets are being snapped up left and right. If there is a meaningful counterbid then even Sagi would not be able to ignore. Might as well hold this one to Scheme Completion...

Nice to see Dan Wright (Exec Chairman) buying once again this week. For me (as I'm sure for many others) there is no stronger green flag than repeated and meaningful insider buying. Together with this week's purchase of 600K odd shares that makes for over 1m shares he has bought this year alone, and takes his overall stake to over 3m shares or 1.58% of equity. No wonder the market welcomed the signal with the shares marked up 17% today. Very intrigued to see what the next Trading Update will bring...

The level to which these shares have fallen is just mind blowing. Prior to today's rise VANL was trading at an implied 2.5x 2018 EBITDA, 30%+ Operating FCF Yield (defined as EBITDA-Capex), an 8.5%+ dividend yield and a P/E of less than 5x. I know the construction sector has been suffering, I know the construction sector is cyclical, I know that there have been company specific problems... BUT 2.5x EBITDA / a 30% OpFCF yield. Just amazing at the (mis)pricing that can happen in the micro cap space. Even after today's relief rally the shares are still basically priced for complete disaster. If management have really stabilised the ship (and of course if, but today's update sounds promising) then today should just be a taster of the further potential re-rating on an 18M view

Or is 10p just close to the Theoretical ex-rights price? I appreciate this wasn't a Rights Issue but using the blended methodology. So 14.25p * 153m + 6p * 93m = 250m at c. 10p. As I have mentioned in another post 10p (with the money banked) 10p is not an illogical current valuation for the business with all current info on the table. And Mr Market is also reacting to the fact that issue got away, the Broker Option was filled and we now have a cash runway for several years of operations. Personally (and call me super naive) I think the ability of MM's to manipulate is over estimated. For every seller there needs to be a willing buyer accepting the given price. But being an investor here I probably am naive :)

At the end of the day some comfort must be taken from the directors' participation. And here I'm particularly thinking of Christopher Moore. He is obviously a wealthy individual. But at the end of the day no one, however wealthy, invests almost £500K into something they believe is a complete turkey. And before people pile in to say that it's just to ST flip there's no way. 1. The brokers would have insisted on some sort of lock-up and 2. liquidity isn't the best here, so any serious selling would cause the SP to tank hard again. Clearly he believes there is value at this level. That doesn't mean I don't believe that this raise shouldn't have been done as a Rights Issue nor that it shouldn't have been done earlier when the SP was higher to avoid the brutal dilution. In retrospect Peter Shaw was clearly an ostrich with his head in the sand praying for a miracle that never came. And again (with hindsight) the biggest red signal was the lack of franchisee take up in recent years. Charitably this is where the plan fell apart as it ultimately it meant a higher cash flow / investment burn than had been budgeted and a return cap in hand to shareholders. So mis-management has clearly played a part. The unsustainable spend of the aggregators has played a part. The question remains, is the model sustainable outside of the biggest cities? It seems to be unequivocal that based on the EBITDA of the oldest stores / splits that it has worked in the Capital. And sensibly management have signalled they will focus there / big cities. The answer will of course determine whether the business can ultimately even survive or actually thrive. Is the realistic end target 100 stores or 300+ stores. Valuation wise we currently have a business with a mkt cap post placing of c. £25m, so 250m shares times 9.88p. Minus £6m of cash that's an EV of £19m. That values each of our current 64 stores at roughly £300k, so roughly in line with DPEU. As for the future? Well assuming that the new raise is sufficient to get to a profitable estate of 100 stores at £0.1m of EBITDA each. Super, super crudely that would be £10m. Apply a multiple of 10x (below both DOM and DPEU) and you have £100m. So with current NOSH that's 40p. An estate of 150 stores (which was the original target) would be 60p. And so on. I am fully sympathetic and concur with the opprobrium being heaped on management. But with a large long position that I reluctantly added to at 8p I am hoping that they will pull that 50p rabbit out of a hat. And my one of crumb of comfort (and the reason I averaged down) is that we are dealing with a world famous brand, an operating model that has proven itself in both developed and emerging markets, 2 commissaries that can support national store growth, etc, etc. Will it be enough I guess only time will tell...

I assume part of the size of the discount is because it’s not underwritten, so brokers are demanding a massive one to ensure it gets away. What annoys me is that if you’re doing something of that size and scale then just make it a rights issue, allowing all shareholders to participate pro-rata. Based on last week’s delayed announcement I suspect that CEO / board were hoping to avoid a capital raise and the penny dropped that there was no alternative. Being charitable a placing can be organised much faster than a rights issue. Although with over £1.5m of liquidity there is no immediate need for capital.

Bottom line. Yes. It’s a sh*t show. In a best case scenario this will be the final raise. Assuming it is sufficient to get to 100 restaurants at £0.1m EBITDA equals £10m EBITDA. Applying a 5x multiple gives £50m. With a new NOSH of 150m we have a theoretical future price of c. 30p - one day, ignoring NPV and assuming all stores can be LT profitable.

Personally it’s a harsh lesson. No more pre-profit VC style investments. Call me an optimist but I still believe there is LT value here and there is no point exiting at this point. But it’s basically one to file and forget about for at least 36 months...

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

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.

It's great news. It means the big Woodford overhang is almost gone. NB: For anyone who hasn't read it I suggest looking at yesterday's capital market presentation. The new CEO has a plan to bring back revenue momentum. So next year will be one of consolidation / investment. But the "cash machine" like business model cash flow dynamics remain intact. Lots still to go for in Mid-term. Market certainly seems to like. Nice to see shares closing above 200p (and up over 8% on the day).

Aside from the wider market weakness one of the main factors at work here (IMHO) has been Woodford selling. At peak he had over 18% of the business. He is now down to under 10%. I have no special insight but it's common knowledge that Woodford investment management is suffering from massive customer withdrawals, which has in turn necessitated the part liquidation of their existing holdings. Therefore I don't think it's a stock specific decision but client driven. And when you get institutional selling of that scale in a smaller share in a weak market there is bound to be significant pressure on the SP. I would argue this is now cracking value at these levels. And at least one new institution seems to agree. Lizard Investors LLC (a US AM specialising in small and mid-caps) confirmed a 4% shareholding in October. Who knows where we go in the ST but I would argue this is a great entry point on a MT view. A take out by one of the big online portals which wants to diversify into another niche is only made more likely at these levels...

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

Lovely trading statement this morning. Character has "witnessed a return to its previous growth pattern during the second half. With Character's UK domestic business delivering record sales, the trading results for the financial year ended 31 August 2018 will comfortably reach market expectations." More importantly "As a business, we feel confident of the prospects for the autumn/winter trading period, which includes the all-important Christmas season". Preliminary results are due out on the 29th November.

I say again that this is such an underrated little company. Exceptional ROCE. A fantastic track record of dividend growth. All achieved with an unlevered balance sheet. If we can get some consistent revenue / profit momentum to take us beyond the Toys R Us scare the shares should fly on a 12-18M view. At under 5.5x forecast EBITDA / 4% yield / 8x PE the current valuation is a steal by all objective standards...

I'm a long term SCH holder, remain positive on the LT investment case and agree that the results were not too shabby. Growth in transaction volumes and value was pleasing. However, I do not find it slightly concerning that the company is continuing to struggle to convert rising transaction volumes / revenues into rising profits. I have no doubt that today's indifferent SP reaction (not even retracing to the roughly 320p level that was common just before the results) has much to do with the lack of profit growth. The rising dividend whilst nice is a red herring IMHO. Looking at the cash statement the company would have had no funds for Capex / new equity investments without dipping into its cash pile, which duly fell from $108m to $86m. Now there is nothing wrong with putting surplus capital to (value-added) work. But its just slightly concerning that in a year of such significant transaction volume growth operating cash flow before working cap was actually down.

I really hope that in the quarters ahead the company finally reaches a scale which allows some operational gearing to start to come through and profits to rise. Otherwise, except for a bid (which I assume we all agree is the end game here and a large part of the holding attraction) the SP will struggle to make much headway from here in the ST. All IMHO...

Hi luckyinvest. Congrats on making your first post! I am also new to this but I find it's interesting to brainstorm and I find there is nothing like putting your thoughts down on paper to help formulate an investment decision. You raise some very salient points.
1. Re. inflation. No doubt a major concern as is the whole macroeconomic situation. They do say in their results (and underlined on the earnings call) that "we are offsetting the impact of higher inflation by increasing our prices more frequently without any discernible negative impact on volumes". And in order to try and preserve margins they are closely managing costs. Latter are no doubt rising in price too but it's important that their ingredients are locally sourced so there is no additional FX risk. Given pizza is a relatively accessible product, they have 50%+ market share, strong execution, etc, the key point is that whilst the crisis undoubtedly brings short term headwinds they actually have the chance to gain market share at the expense of their weaker competitors
2. Russia. I think the crucial point here is that when entering new markets the key objective is to win market share and develop a strong customer relationship. If you can get new customers to try you once and they like the product the hope is that they come back again and again. This is a common fast food strategy (and not just fast food) worldwide. If you look at other Domino's markets there is a loss making period for every store, which is factored into the business plan, which includes extreme promotions to drive footfall.

I strongly disagree that DPEU is a value trap. If the picture were as bleak as you portray there wouldn't be a single western fast food brand in any emerging market. Why is McDonalds in 119 countries and not just in developed nations? Because they have a strong brand, super slick execution, pricing power in times of economic turbulence, etc, etc. And EM brings the attraction of a growing middle class (on a mid to long term view) who still look at going to Mcdonalds or Dominos as aspirational. Then again I am for the most part an ultra long term investor and not a trader. Also I invest in businesses not share prices. There is a frequent disconnect between price and intrinsic value sometimes in your favour and sometimes not. Frankly I couldn't care less what happens to the DPEU share price in the ST. What matters is that the business continues to expand so that it positions itself as best it can for economic normaliasation as and when it comes. Now you may think that Turkey / Russia are the next Venezuela. I really don't think so. But I don't disagree it's a super risky one. And not a share I would attempt to "trade". But if you have a 5 year time horizon I think this makes for a very interesting entry point. Good luck with your decision!

Just one quick further thought on value. It's a bit apples and pears but MP Evans (different scale & maturity) is currently trading on 4.5x sales and 14.5x EBIT for 2017. The comparable figure for DKL is 1x sales and 9.1x EBIT. So I know I'm not discovering America here but assuming that DKL can reach comparable levels of profitability as its estate matures then it is a "relative" steal at these levels. Of course if...

Hi all. The final results reported net debt of c. E16.7m at y/e 2017 i.e. LT debt of E13m + Current debt of E4.5m - Cash of E0.8m. The debt (details in note 9) comprises a number of bank debt tranches carrying coupons of between 7-10%. I have not done a detailed debt table but taking a blended rate of 8.5% and that gross debt figure would imply (super approximately) an annual interest charge of c. E1.5m before any capital repayments. The actual cash interest figure for 2017 was E1.3m according to the accounts. So not that far off. The cash available to service this figure amounted to E3.7m comprising Net Income grossed up for non-cash charges. Taxes are tiny at this point. Post interest costs DKL still had over E2m of surplus cash, which was mostly re-invested in the business. Net of capex, the dividend and some modest debt repayment the group had total negative cash flow of c. E1.2m, with this coming out of a falling cash balance, which declined by the same amount.

I don't claim to be a credit expert but based on the above things are tight but not necessarily disastrous. If it comes to it there is clearly scope in the business to cut discretionary capex and / or future dividends until such time as higher prices return in order to service debt. Net leverage at 3.7x historic EBITDA is high but not insane. The question mark is over the willingness of banks to refi as the loans mature. But so long as the interest is being serviced and the credit is seen as a "good one" this should be eminently manageable. The million $ question is of course the impact of lower prices on the results for 2018. Also hard to see how any significant new projects (e.g. cashew) can be funded without fresh equity unless there is a dramatic reversal in prices, as there appears little room for this in the existing business at current prices.

All in all it's hard to come to any definitive conclusions without more info. Totally agree that mgmt could do themselves a lot of favours by being more transparent with investors. IR has been appalling and no wonder the market is spooked. That said unless there is a complete prices / harvest collapse it doesn't look like the company is heading for bust. A Rights Issue may at some point become necessary to provide more financial cushion and / or fund new projects. The fact that stakeholders have not been buying at these levels seems to imply that an RI may well be on the horizon. Assuming it is discounted then of course will be the time to buy. Unless they want to take it private on the cheap. All speculation of course. Let's hope we get some clarity soon...

Perhaps the market thinks a bid is cooking? ETO has long been a mooted target. With content king right now that surely is the eventual end game

There's a lot to like about Murgitroyd based on these results:
1. Prudent management who are not afraid to invest in the business but otherwise committed to a progressive dividend policy and paying out surplus capital
2. Dividend has grown 50% odd in the space of four years and by 23.5% in the last year alone. Despite a strong run up in the SP dividend yield remains just under 3% - not bad in today's market
3. Brexit hedged. Increasingly diversified international revenue stream that on balance will benefit from any further GBP weakness
4. 50% gross margins, Mid-teen ROCE, net cash positive balance sheet, well invested asset base
On the flip side the missing piece of the puzzle is revenue growth, without which it's hard to see the shares making serious further progress from these levels. If mgmt could just build some revenue momentum the share could really fly on a mid-term basis. In the interim an interesting hold for those looking for a defensive, good dividend payer to diversify a portfolio.