DMP 1.33% $32.71 domino's pizza enterprises limited

Share Buy Back, page-8

  1. 79 Posts.
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    There are quite a few errors in this calculation that make your scenario sound much worse than it is.

    A-G is fine although I have used the current share price of $44.59 instead of the $42.50.

    The first thing I think is the assumption of 5% and quotes from others that this is too low. Exactly where are you pulling these figures from? Page 71 of the Annual Report outlines the current average interest rate of 1.43% and Page 86 of the Annual Report outlines the current debt breakdown. Also in the article you referenced management has dropped a hint about operating in some of the lowest interest rate markets in the world. To me this is an indication that their intention would be to borrow the bulk of the funds from these markets given that half their debt is current the euro loan and about 1/6 is Yen denominated debt this would just continue this practice. Not saying that they will get the additional finance at 1.43% but rates of 5% and 6% seem quite high and unjustified given their current levels interest rates.

    Adjusting the interest rate to something more comparable to their current rates has a significant effect on the economics of the buyback.

    The next issue is that you have taken the interest bill and subtracted this from NPAT, however this should be deducted from EBIT (Earnings before interest and tax). Then deduct current plus new interest charges and then apply the tax rate of 30.2% to the new PBT deducting the $7.7m from minority interest share of profit. This gives an adjusted NPAT of 115.3m approx. An improvement in the EPS of 5%.

    Looking at your second example and correcting these errors in the calculation you start with NPAT of 142.2m which I have adjusted for the cost of interest on NPAT as their guidance noting the 20% excluded the effect of the interest on buyback debt. This gives a forward NPAT of approx 139m factoring in a 30.2% tax rate and 4.5m in additional interest costs on debt (1.5%). This represents a 6% increase in earning per share vs not doing the buy back.

    Having said all this while this validates managements claim that the buyback is accretive the return on this investment seems like a very poor use of capital however makes sense if management do not see any meaningful acquisitions in the next 12-18 months. As an example if they were using the 300m for acquisitions using some of their European acquisitions as an example around 11x EBITDA would be closer to 10% EPS accretive. To me this is the real message with the buyback that we shouldn't expect any sizable acquisitions.

    I have included updated tables below with calculations, have used a 1.5% interest rate which is slightly above that currently being paid for debt by company. Changes in this would affect the outcome. E.g. between 4-5% interest on debt it becomes non-accretive on current year figures and a little over 5% interest it becomes negative EPS based on 20% NPAT growth in the forward year.

    Column 1 Column 2
    1    
    2 NPAT (a) 118,500,000.00
    3 Buyback Proceeds (b) 300,000,000.00
    4 Buy Back Price (assumed) (c) $44.59
    5 Issued Shares - pre buy back (d) 88,870,000.00
    6 EPS - pre buy back (e) $1.33
    7 Shares Bought Back (f) 6,727,965.91
    8 Issued Shares - post buy back (g) 82,142,034.09
    9 Company borrowing rate (assumed) (h) 1.5%
    10 Additional Interest to Company (i) 4,500,000.00
    11 Previous Interest 4,451,000.00
    12 Total Interest 8,951,000.00
    13 EBIT Prior 185,200,000.00
    14 PBT Now 176,249,000.00
    15 Adjusted NPAT - post buy back (j) 115,321,802.00
    16 EPS - post buy back (k) $1.40
    17 EPS Change 105%
    Column 1 Column 2
    1    
    2 NPAT 142,200,000.00
    3 Buyback Proceeds 300,000,000.00
    4 Buy Back Price (assumed) $44.59
    5 Issued Shares - pre buy back 88,870,000.00
    6 EPS - pre buy back $1.60
    7 Shares Bought Back 6,727,965.91
    8 Issued Shares - post buy back 82,142,034.09
    9 Company borrowing rate (assumed) 1.5%
    10 Additional Interest to Company 4,500,000.00
    11 Previous Interest 4,451,000.00
    12 Total Interest 8,951,000.00
    13 Adjusted NPAT - post buy back 139,000,000.00
    14 EPS - post buy back $1.69
    15 EPS Change 106%
    Last edited by grasshopper05: 21/08/17
 
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