DP Poland (DPP) – The bull and bear case

DP Poland (DPP) – The bull and bear case

PDP Poland (DPP) is the Domino’s Pizza master franchisee for Poland.

If first listed in July 2010 at 50 pence (latest share price 24.5p, market cap £37.4 million). It then opened its first outlet in Warsaw in 2011 and is on track to have 65 outlets by the end of 2018. There is scope for it to have over 300 stores.

It’s a potentially exciting story, but I do have some concerns about the track record so far.

A classic rollout story, with some issues

DP Poland appears to offer an attractive rollout story given that Domino’s Pizza is the leading pizza delivery brand. However, the increase in the share count is concerning and profits remain a number of years away.

In short, it is possible to build both a bull case and a bear case for DP Poland. This article has done just that and I will leave it for readers to decide (and hopefully comment) on the question of whether DP Poland is an attractive investment.

Filling up Poland with pizza outlets

(Source: DP Poland)

DP Poland share price since listing at 50p in 2010

(Source: Google Finance)

DP Poland: the bull case

The bull case is that DP Poland is now approaching critical mass with losses expected to decline from 2019 onwards. With the first store having been opened in 2011, it has taken some time to get to this point.

Revenue in 2015 was only £3.56 million but in 2019 revenue is expected to hit £20 million. In short, DP Poland has become a real business and the bottom line is now set to improve.

DP Poland’s bottom line is set to rapidly improve

(Source: SharePad)

A key profit driver is that Domino’s Pizza outlets become more profitable as they mature. This is particularly relevant to DP Poland given that most of the group’s store estate is relatively immature.

The hidden profit potential of DP Poland’s estate

(Source: Hardman and Co: link)

Store popularity is highlighted by the robust like-for-like sales that DP Poland has seen to date. Busier stores translate into more profitable stores and suggest that the Domino’s Pizza brand is doing well in Poland.

DP Poland like-for-like sales: stores are becoming busier

(Source: DP Poland)

Management of DP Poland is experienced with CEO Peter Shaw having previously run Coffeeheaven International in Poland (taken over by Whitbread). DP Poland CFO, Maciej Jania was the finance director and co-founder of Coffeeheaven.

It is notable that the stores opened by DP Poland appear to be higher quality that those in the UK. They allow customers to see, for example, that the dough being used to make the pizzas is fresh.

Domino’s Pizza in Poland: classier stores than in the UK

(Source: DP Poland)

Turning to the potential and there is scope for at least 300 outlets in Poland according to the group. This appears to be a conservative estimate with Hardman stating that there maybe scope for at least 400 outlets (link).

The Polish economy is performing well and was recently upgraded to a developed market status.

Future capital spending will not be onerous given that current commissary (a dough making facility) capacity supports 150 stores. The group had a £3.8 million net cash position at mid-2018 having last raised money in June 2017.

DP Poland: the bear case

At the last count 44% of the estate is sub-franchised but no new sub-franchised stores opened in the first half of 2018. A net two new sub-franchised stores opened in 2017 and the lack of progress here is concerning.

Competition is a risk with Poland having a number of established pizza brands. A quick look at the largest company in the sector, Da Grasso, suggests that the Domino’s Pizza brand offers something different.

State of the Pizza market in Poland

Source: Hardman and Co (link)

A Da Grasso store: not as nice as a Domino’s Pizza outlet?

(Source Da Grasso website)

DP Poland started trading with 20 million shares in 2010 and currently has 153 million shares outstanding. This reflects repeated equity issues to finance growth and also share options issued to executives.

A total of 3.4 million options were exercised in 2017, increasing the share count by 2.3%. The 2017 annual report also reveals that there are 8.352 million share options outstanding – 5.4% of the current shares in issue.

DP Poland has done well….at issuing new shares

(Source: SharePad)

Management share ownership and remuneration is another concern.  Mr Shaw was paid £163,000 in 2017 with this including a £38,000 bonus while Mr Jania was paid £118,000 in 2017 with this including a £32,000 bonus (the group made a £2.6m loss in 2017).

At the end of 2017 Mr Shaw only had a 0.9% (worth £336k) stake in DP Poland while Mr Jania had a 1.55% (worth £565k) stake.  Mr Shaw has 3.2 million 2014 plan vested options with an exercise price of 0.5p (all current share options appear to be exercisable at only 0.5p link).

Director shareholdings at the end of 2017: not much skin in the game

(Source: DP Poland)

Valuation

DP Poland’s enterprise value (EV) of £35m compares to the 60 stores the group operates. Domino’s Pizza Group (UK) has a £1.5bn enterprise value and 1,213 stores.

The UK group’s stores are therefore valued at £1.24m each versus £0.6m for DP Poland. If DP Poland can makes its estate as profitable as its UK peer there is clearly room for a significant re-rating.

One way to look at the valuation of a business is by comparing enterprise value (net debt plus equity) to revenue over time.  When DP Poland listed, this ratio was 29X but it is currently on track to fall to less than 2X in 2019.

DP Poland enterprise value to turnover: becoming cheaper

(Source: SharePad)

Summary

Early stage companies are difficult to get right. Venture capitalists, for example, have one big hit for every 5 or 10 also-rans. DP Poland has not delivered to date but does appear to be approaching critical mass.

However, the low level of management share ownership and significant share option issuance is not encouraging. Poland’s economy is performing well but it is not clear if DP Poland shareholders are set to benefit.

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