ii view: Domino’s sells its Icelandic pizza ops

A focus on the UK and Ireland and plans for 200 more outlets. Buy, sell or hold?

Business sale  

ii round-up:

Pizza chain Domino's (LSE:DOM) today announced the sale of its Icelandic operations to a local investment consortium for a total of 2.4 billion Icelandic króna, or approximately £13.7 million.

Domino’s, which operates over 1,200 outlets across the UK and Republic of Ireland, sad proceeds from the sale of the 23 outlets will initially be used to reduce group debt. 

Domino shares rose by just over 1% in UK trading, leaving them up by just over quarter during the last year. Shares for pub owners Wetherspoon (LSE:JDW) and Marston's (LSE:MARS), whose outlets have been shut for much of the last year, are up by more than 50% since pandemic induced lows this time last year. 

The sale follows a decision in October 2019 to sell all its directly operated international operations in order to allow management to focus on the core UK and Irish businesses. 

Last year, the company sold its Norway operations and in early March confirmed the sale of its 14 Swedish outlets for £1.8 million in cash.

Full-year results to 27 December saw it report an 11.4% jump in sales for its UK and Irish businesses, aided by strong takeaway demand under the pandemic. UK online sales rose by nearly a quarter over the year, with online demand now generating 94.3% of its delivery sales in the UK 

ii view:

The company holds the master franchise agreement to own, operate and franchise Domino's stores in the UK and the Republic of Ireland. It opened its first UK outlet back in 1985. Its outlets have remained open during the pandemic. Growth in its delivery sales helped offset a significant hit to its collection business under the virus. 

The firm’s relationship with its franchisees has always proved smooth. During 2020, management attempted to reset its relationship. The group’s medium-term goal now targets total system sales of between £1.6 billion to £1.9 billion, up from the £1.3 billion made over 2020 and aided by the opening of an additional 200 stores. 

For investors, proceeds from this latest sale enable a reduction in group debt. During the financial year 2020, net debt fell by 26% to £172 million. A changed management team continues to try and improve the relationship with franchisees, while a forecast dividend yield of around 2.8% is not to be overlooked in the current ultra-low interest rate era. That said, vaccines and a planned roadmap out of lockdowns could see UK consumers favouring restaurant visits for a period, while an analyst fair value target of 326p sits below the current share price. 

Positives: 

• High online sales
• £45 million share buyback programme commenced

Negatives:

• Reduced geographical diversity
• Intense competition

The average rating of stock market analysts:

Weak hold