Australia | Jun 17 2021
Dominos Taiwan, Dominos Pizza's first push outside of Japan on its way to building a larger Asian business, has potential to turbo-charge growth but patience is required
-Domino's Pizza's Taiwan acquisition offers material longer-term upside, but little in the short term
-Lessons from Dominos Japan could help turbocharge Taiwan growth
-Brokers remain confident about structural growth path, but differ on present share price valuation
By Mark Story
Just as it has done successfully in other regions, such as New Zealand and Europe, Domino's Pizza Enterprises ((DMP)) plans to weave its magic in Taiwan, the latest country in the fast-food companys global expansion plans. As part of plans to expand the brands footprint in Asia from 1500 stores to 1900 stores by 2032, Dominos recently acquired the Dominos Pizza master franchise Taiwan for $79m.
Completion of the Dominos Taiwan acquisition is expected in first half FY22 and is subject to local regulatory approval.
Whilst the acquisition is small in the context of Domino's current store network, management plans more than double the current 157 corporate and franchised store network to more than 400. This in turn would lift the total group store target (FY25-33) from 5,550 to 5,950 and to over double its first half FY21 global footprint.
With 400 stores, Dominos Taiwan would have a network around 55% greater than its largest competitor, Pizza Hut.
Despite the historically high 16.5x multiple the company is paying for Dominos Taiwan, network sales per store and earnings (EBITDA) per store at the Taiwanfranchise are materially lower, relative to Dominos Japan, and -43% lower than previous acquisitions.
Citi believes this presents potential upside to significantly boost earnings over time. For example, in calendar year 2020the average network sales per store was $0.5m for the Taiwan business, compared with $1.4m for Japan, while earnings/store in Japan was more than 7x earnings/store for the franchise in Taiwan.
The broker suspects the higher multiple could be a result of the lower need for store conversions in Taiwan compared to some of the European acquisitions and/or the modest capital acquisition outlay.
Dominos Taiwan reported $4.8m of earnings in calendar year 2020 and Dominos estimates the acquisition to be 2% earnings per share (EPS) accretive on a FY20 pro-forma basis. The transaction will have no contribution to FY21 earnings.
In FY22 Dominos expects the Taiwan operations to have a marginal positive contribution due to timing on completion/synergy realisation and digital investment, including non-recurring expenses/capex of -$10-11m over the first 3 years.
While brokers recognise the strategic significance of the Taiwan acquisition in helping to expand the companys Asian footprint, they expect it will take time to integrate the business and understand the nuances of a new market. As a result, news of the latest acquisition has done little to alter valuations or brokers overall outlooks on the company.
At this stage, Credit Suisse has incorporated $5m earnings from FY23 into forecasts, which doesnt factor in potential upside from network expansion or store productivity improvements. As a result, changes to Credit Suisse forecasts are minor, and the broker maintains an Underperform rating (target price $70.71).
But if Dominos can leverage its existing digital expertise and the infrastructure of its global operations, the broker suspects improvements in store productivity could contribute to material earnings upside over time.
Morgans expects Dominos plans for Taiwan to be similar to the companys other regional acquisitions. The broker believes Dominos is as well placed as it has been in some time and remains attracted to the groups long term opportunity via store rollout/scale benefits, strong same-store sales growth trends and future M&A upside.
Given the extremely strong first half growth from its Japanese operation, the broker expects Dominos to deliver FY21 earnings growth of 31.6%.
However, while Morgans continues to view Dominos global growth story favourably, following a strong re-rating in recent months and 45x FY22 PE, the brokers rating is lowered to Hold from Add (target price $123.35).
Morgans expects the plan for Taiwan to be similar to that of Japan, and all about growing volume and stores. The broker also expects proximity to Japan to allow for synergies and shared services in functions like marketing and store operations that could potentially turbo-charge growth.
As a result, Morgans can see a clear path to higher sales/margins for Taiwan as Dominos rolls out its typical playbook - including implementing IT infrastructure, leveraging local support structure, improving the customer offering and accelerating store openings.
Track-record of performance improvement
When considering the Taiwanese population of 23.5m, Macquarie suspects Dominos ambition to grow the Taiwan business to 400-plusstores is conservative. Using Australia as an upside case - as Dominos most penetrated market - the broker believes Taiwan could grow its network to 650-plus stores. But that said, Macquarie is making no EPS forecast changes at this time.