Peel Hunt has downgraded Domino’s Pizza Group PLC (LON:DOM) to ‘hold’ after the 800lb gorilla of the pizza delivery market reported slowing sales growth.
UK like-for-like (LFL) sales were up 4.9% year-on-year in the fourth quarter, which was an improvement on the 3.9% growth rate in the preceding quarter, but growth in the current year has been stodgier at 1.5%.
“The Winter Survival deal (which accounted for over 30% of sales in January 2016) did not perform as well as last year (due partly to a diluted offer, removing the cookies), a softer market, and Pizza Hut becoming more aggressive,” the broker said, as it abandoned its ‘add’ recommendation.
Peel Hunt is sticking with its profit before tax forecast of £94.4mln for the current year, which is practically bang in line with the consensus forecast, despite current year LFL sales growth falling below expectations.
“As we said last week: one cannot expect LFL sales to grow by double-digits forever or for new stores’ average sales not to contract; and to partially compensate this in the investment case, excess cash generation should be recycled into overseas expansion and share buybacks; however, we did not expect LFL sales to fall below our 3% forecast assumption,” Peel Hunt admitted.
Fellow broker N+1 Singer was already of a neutral persuasion and has stuck with its ‘hold’ recommendation following this morning’s trading update, though that may change if the shares do not recover from losing one-sixth of their value this morning.
It said the 2016 figures looked “bang in line” with its expectations.
“Geographically the main thing to point out is the reference to Germany where conversion of the acquired Joey’s business into Domino’s stores is ahead of schedule. We also note a small acquisition in Norway this morning through the Nordic JV and the assumption of a controlling stake in the latter,” the broker said.
Domino’s has acquired Norway’s third largest pizza chain for £4mln and has also restructured its Nordic operations so it now has a controlling interest in the Domino’s businesses in Norway, Sweden and Iceland.
“The main focus this morning we feel will be the muted start to FY17 in the UK with LFL sales growth of only 1.5% after 9 weeks, albeit against a stiff 11% comp,” N+1 said.
“We will review our forecasts post the analyst meeting but currently we are working off a 3.5% LFL assumption and do not envisage any notable changes,” the broker added.
The shares currently trade on 26 times N+1’s projected earnings per share for this year.
“The shares we feel are likely to come under some pressure this morning given the soft start and the fact that forecast momentum is becoming less of a feature,” it concluded.