Goodman struggles with bread, while Domino’s finds dough lucrative

Criterion
August 14, 2012
The Australian

TURNING wheat into bread continues to prove a low-yield exercise for the hapless Goodman Fielder, but converting dough into pizzas is proving a far more lucrative proposition for the can-do-no-wrong Domino’s.

Both operators have to be wary of soft commodity prices – especially for wheat – given the prospect of a disastrous drought-afflicted US harvest.

Goodman Fielder (GFF, 50.5 cents) is taking a Churchill-esque approach to its turnaround task, offering more blood, sweat and tears as it chips away at its $100 million cost-cutting program.

“We expect to see very challenged market conditions continue,” CEO Chris Delaney says. “Consumer confidence will remain subdued.”

Beyond that, investors will have to wait for September 3 strategy day for the real outlook striptease.

The custodian of brand such as Wonder White, Vogel’s and Helga’s, Goodman unveiled a $96.6 million normalised net profit, 28 per cent lower, with the reported $147 million loss blighted by $267 million of abnormal costs (including $187 million of asset impairments).

Delaney dubs the numbers as “obviously very disappointing, regardless of the difficult trading conditions”. But he’s heartened the patient’s condition stabilised in the second half.

Probably the most pertinent snippet this morning is that Goodman Fielder is close to finding a buyer for its Integro commercial oils business, having entered an exclusivity period with one of several interested parties.

The NZ Milling business, which is also up for sale, is subject to negotiations with a number of parties.

Some analysts believe that without these asset sales, Goodman will face renewed balance sheet pressure despite last year’s $259 million rights raising (at 45 cents apiece). The two businesses are expected to fetch $210 million to $270 million.

On one bright note, management produced evidence that despite the hype around supermarket own-brands, private-label share of the bread market has been declining and now stands at around 15 per cent.

Goodman retains a dominant (35 per cent) market share, but one of its challenges is to make money out of its own contracts to produce private-label bread.

Domino’s meanwhile goes from strength to strength in Europe as well as locally, unveiling a 25 per cent net earnings increase to $26.9 million and forecasting current-year earnings growth “in the region of” 15 per cent.

The reason for management’s confidence is a planned rollout of 70-80 new stores, taking the total number to 980 to 990.

Pizza is a recession-proof food and well-suited to angst-driven Europe, but the Domino’s (DMP, $9.66) story is more about use of digital ordering, including Facebook, to drive down costs and reduce delivery times.

Domino’s chief Don Meij reckons Dominos should be compared to Amazon and eBay and with 55-65 per cent of Domino’s orders now lodged online, he’s not entirely joking.

Criterion has viewed Domino’s stock as overvalued, last ascribing a sell at $7.70 on February 16 this year. Our rating is under review but it’s likely to be delivered with an apology and a bunch of flowers.

We also rated Goodman as a sell at 54c in February and plead further time to mull whether the stock is on the cusp of a turnaround or merely promising another false dawn.