Dp Poland - DPP Stream Log

NB2: What I can't understand is why DOM UK, which seems to be struggling to deploy capital sensibly right now doesn't just take DPP out at today's modest valuation. The hard work has been done. Inflection is close and all that's needed to finish the job is some additional capital to accelerate the store roll out and press the pedal to the metal on marketing. Now that would be a crying shame despite the upfront premium...

NB: If all that sounded a bit bearish nothing could be further from my mind. Assuming they hit 100 stores by end of 2020 at which point 75% of the estate is close to mature i.e. £0.1m EBITDA pa. That's £7.5m of EBITDA x a multiple of 20 as per DPEU would suggest a EV of £150m. Sure there will be some small dilution to investors from the interim placing. But that's still significant upside from today. And more importantly takes no account of the "hope" value of self-financing continued expansion at that point, which Mr Market will also factor in. So I would argue tuck in at these levels. And leave. I can't imagine (barring WWIII with Russia) there will be a much better opportunity than today's level. Just a shame that Rome was not built in a day...

But until the placing is out of the way (and crucially we have the associated price signal i.e. what price is needed to attract institutional funding), and further evidence of sales / EBITDA success outside Warsaw I expect the shares to tread water.

I think the biggest positive of today's announcement was that their most mature stores are delivering higher sales and EBITDA than their original "mature store" model predicted. If non-Warsaw stores can eventually follow this path then that is massive for future value. But I agree with you coffe911 that the capex lighter franchise led roll-out seems to be taking a back seat pending a more mature estate. This means higher upfront capex. With available cash of £4.5m and likely 2018 burn at a similar level (I'm assuming the new commissary spiked spend last year) then another placing is clearly coming in the next [6] months. Hopefully that should take them to c. 85 stores by end of 2019 and operating cash flow break even as the estate matures

Part 2. Now of course the below is all super crude as it assumes no time value of money effect, that DPP can get from 50 to 150 stores with minimal third party capital i.e. cash flow break-even is round the corner and many of the new stores will be franchisee owned rather than corporate (which of course also changes the economics), that all stores are able to hit PLN 500K, etc, etc. However, there is also a scenario that DPP are eventually able to roll-out more than 150 stores. This is not that far-fetched given DOM UK has north of 850 stores in an area with a population less than double Poland's. Also Polish GDP has been rising and the take-out culture has been growing with it. Hence there are significant upside risks. Imagine LT DPP can get to 300 stores. Suddenly you have a company that even at 10x EBITDA is £300m i.e. 5 times today. Anyways, that's very roughly how I think about DPP and why I see it as a core LT hold...

Re: How do you analyse this stock? One back of the envelope method is to look at annual store EBITDA at maturity. In 2016 the most mature store had an annual EBITDA of PLN 536K i.e. roughly GBP100K. Assuming no further growth in store numbers and the whole estate hitting this target (nb: Peel Hunt, for example, are estimating PLN 500K as a sensible figure across the estate). You get to £5m. Apply a 10x EBITDA multiple and you have £50m i.e. a little south of the current valuation. But now imagine that DPP gets to their target number of 150 stores and apply not a 10x multiple but 15x, which is where DOM UK is still trading in its mature stage, de-rated state. So £15m & 15 equals £225m i.e. 3x upside from here

That's the $64,000 question. My suspicions would be 1. unease / impatience over the timing of cash flow break even, and 2. Erroneous read across by investors from the recent travails of DOM UK to the LT attractiveness of the DOM model / brand. The market is by definition an impatient beast so an early stage, high upfront investment company, such as DPP, is always liable to be volatile / try the market's patience until such time as it achieves "sustainability" i.e. cash flow break even. For what its worth the only way I think one can approach the investment case here is on an ultra long term basis. Hence, ignore the day to day share price drift (annoying as it is) and just focus on the operating fundamentals. And here management appear to be delivering. Moreover, there is comfort from the recent performance of DP Eurasia. The Dominos model has worked across various socio-economic models and income levels i.e. in Turkey, Russia, US, UK, Australia. I have no doubt that we will get there in Poland too. The inflection when it comes (i.e. when market realises we are close to cash flow break even) will cause a rapid re-rating of the share price. One can take the view, as many impatient investors who are pressuring the share price, that one can just jump back in then and redeploy capital in the interim. Given the relative illiquidity of the share that won't be easy. I prefer to stay invested here and just ignore the day to day flux. The turn will come here. And perhaps as early as H2 18.

I think what may have disappointed the market is the lack of any mention around EBITDA performance, particularly of the oldest stores. If you look at previous trading statements there has typically been a mention. Hopefully, there is nothing sinister behind the omission and management are simply saving the detail for the full year results. Also, let's not forget the massive recent run up in the share price. DPP's market cap is now approaching £80m or roughly £2m per store. That is not far off DOM UK with its £1.8bn+ valuation and 850+ (cash generating, high EBITDA) store estate. Now I know that DPP has a far superior growth profile, which goes a long to explain the difference. But I suspect that until the market sees news around continued EBITDA ramp up and (above all) details around the timing of cash-flow break-even, the share price may struggle to progress further in the short term. I say all this as someone who has held the stock since it was below 20p, has no intention of selling and is a massive LT bull on the company

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