Tough cheese

TRADING UPDATE

Need To Know

• DMP expects 1H23 earnings to be materially lower
• Full year earnings to be hit by ~$7m FX headwinds
• CEO has acquisition bonus in FY23 remuneration

DMP is expecting 1H23 earnings to be materially lower due to one trading week fewer than last year and inflation and currency headwinds. The company remains optimistic it can meet the challenge, but store profitability is under pressure.

FX headwinds will snip ~$7 million from full year earnings. Excluding the currency problem, DMP expects to deliver ‘full year earnings growth’.

The medium-term outlook for store sales remain +3-6%, but 1Q23 began slowly at -1.8% growth in network sales, -1.0% same store sales (SSS) growth, with a +1.6% improvement in October.

DMP expects store openings to accelerate in 2H23f “provided franchisees continue to observe an improved performance in offsetting inflation”. This will be challenging, in our view, given the higher cost of goods sold is squeezing gross margins.

CEO Don Meij’s remuneration contains a $750k ‘acquisition bonus’ for FY23. Although the CEO’s remuneration is largely driven by EBIT, EPS, SSSg and franchisee profitability, an acquisition bonus element has been added. The latter is directly related to the recent Singapore, Malaysia and Cambodia acquisition. We note that DMP is identifying multiple smaller in-fill acquisition opportunities in existing markets as competitors struggle. The CEO’s base remuneration was increased 33% for FY23 to $1,717,500. The deterioration in company earnings in the last two years has seen the CEO achieve just 24% and 21% respectively of the potential total remuneration available.

Investment Implications

Like all fast food restaurants, DMP is facing higher energy, labour and commodity costs. Mozzarella and wheat prices are up 30% and 31% respectively (in AUD) over the past year. Price rises of 5-10% are needed to cover just the increase in COGS and this does not happen overnight.

Store openings are below last year and now also depend on franchisee profitability that we can see is struggling. The confidence to recover lost ground in 2H23f is admirable but difficult.

The CEO’s specific acquisition-focused bonus element could be a distraction from the company’s core store rollout programs, particularly in Japan and Europe.

We think the company remains fairly valued at 24x FY24f EPS consensus forecast.