AIM-listed DP Poland (LSE: DPP) was founded in 2010, acquiring the exclusive master franchise to roll out Domino’s Pizza in Poland. Initial investor fervour was dented after the first year when the original growth targets proved rather too ambitious and had to be pulled back.
The scenario of market enthusiasm post-IPO, followed by disappointment if there’s a setback, isn’t uncommon with new companies on AIM. However, fundamentally sound businesses come through in the long run. Six years on from flotation, I reckon DP Poland is now looking an interesting proposition for investors.
Long growth runway
In half-year results announced this morning, management said store opening momentum continues to build, with six stores opened in the year-to-date, taking the total to 29 stores. Strong like-for-like performance of existing stores (+28%), plus the contribution of new stores saw total retail sales (corporate and sub-franchised locations) up by 57% from H1 2015.
A rapidly growing store estate requires considerable investment in property and people, and DP Poland will be lossmaking for some years yet as a result of this upfront investment. This is a normal situation for a franchise rollout from scratch. In time, costs reduce as a percentage of sales and the company starts generating profits.
Generally speaking, I’m not too enamoured of lossmaking businesses. However, Domino’s Pizza has proven itself to be a highly successful brand in many countries and the indications are that Poland will be no different. The company’s annualised revenues are currently under £6m, and with Poland’s population of 38.5m there a long growth runway ahead based on Domino’s revenue per capita in more mature markets.
On this basis, I don’t see a current valuation of 11 times sales at a share price of 50p as prohibitive for long-term investors.
Market-beating growth
In contrast to DP Poland, Dairy Crest (LSE: DCG) is a long-established and profitable food business. The company, which completed a transformational sale of its dairies operations at the back-end of last year, is now focused on food products, led by its four key brands of Cathedral City cheese, Country Life butter, Clover spread and Frylight cooking spray.
In a trading update released this morning, the company said it expects to report a “good performance” for the first half of the year, and that the outlook for the full year remains unchanged.
Country Life, Clover and Frylight are showing strong volume growth and increasing market share. Management expects a small volume decline from Cathedral City but an improved margin as it has chosen to discount less than competitors to maintain the brand’s premium positioning during the period.
Management reckons that as “a strong branded and added value business, Dairy Crest is well placed to deal with inflationary pressures.” City analysts agree and have pencilled-in earnings growth of 13% for the company’s financial year ending March 2017.
Dairy Crest’s price-to-earnings ratio is 16.4 at a current share price of 640p, and the forecast dividend gives a yield of 3.6%. This is a highly focused business relative to a global diversified brands giant such as Unilever. But focusing on a few things and doing them very well isn’t a bad strategy and can deliver market-beating growth. Dairy Crest looks set to do that, and I reckon the earnings multiple and dividend yield represent decent value.
