Buy DP Poland (DPP) at 69p

A report from the IPO experts at AllNewIssues.com

The IPO experts at AllNewIssues.com covered DP Poland, one of the latest firms to join the AIM market, at the end of last month. Since then the shares have powered ahead, gaining 23% in just two weeks. For access to more in-depth research reports on the latest hot new issues, for less than £20 a year, click here.

Background – Domino's Pizza UK and Ireland* (DOM) has been and remains one of the darlings of the UK stock market. The owner of the rights to the US pizza franchise in the UK and Ireland has created phenomenal shareholder value over the last 10 years with its commitment to deliver freshly made pizzas in under 30 minutes proving to be a huge hit with customers.

Hoping to follow in its footsteps, the senior management of former AIM-listed business Coffeeheaven, which had a major presence in Poland, have purchased the exclusive rights to the Domino's franchise in the Eastern European country in the hope of making DP Poland (DPP) into a similarly successful business. Shares in the business were admitted to AIM at 55p on 28th July with the firm raising net proceeds of £5.72 million via a placing at 50p.

Operations - DP Poland owns the exclusive right to develop, operate and sub-franchise Domino's Pizza stores in Poland. At present the group has no operations in the country but it intends to operate the same business model that has seen the Domino's franchise succeed in the US, Europe and UK.

Stores will be located to ensure that the group can deliver pizzas within 30 minutes of receiving an order in areas where there is a large number of affluent citizens aged between 25 and 35. The attractions of the business model are clear as a a home delivery-focussed restaurant can operate from smaller premises (typically just 100 square metres as there is no need to rent space for diners to eat) resulting in lower capital expenditure and expansion expenses.

DP Poland intends to offer the same broad range of pizzas available in European markets but also to cater its offering to local tastes by using traditional sausages, regional cheeses and vegetables. Management hope to use the funds to open at least 27 stores by the end of 2012 starting from the country's capital of Warsaw. After then the business hopes to roll out stores across the country and to possibly sell franchising rights to other operators with the objective of having 65 stores in operation by the end of 2014.

Assessment - Since the group's operations will be entirely focussed on Poland the country's economic health is a key determinant of its financial prospects. The IMF forecasts the EU member nation's GDP to grew by 2.75% in 2010 and by 3% 2011 which bodes well for discretionary expenditure.

In its admission document DP Poland states that the 38-million strong country has a “substantial urban population” with five major cities having a population of over 0.5 million residents. This allows the group to locate stores in heavily populated areas which will be needed for the success of its home delivery model. The group also cites research stating that the average size of the Polish household is in decline – a trend which has resulted in a growth in the popularity of takeaway and delivered restaurant food. Furthermore, a trend towards longer working hours and dual career households that also signals rising higher demand for home-delivered food. In addition, research conducted by TNS OBOP found that only 25% of the Poles ordering pizza were very satisfied with existing propositions which the firm cites as evidence that its service will be a welcome development.

While the Domino's franchise model has been proven to be a success in Europe and the UK there is considerable execution risk tied with such an early stage venture. No stores have been acquired as yet and no indications have been provided about the selection of suitable sites for outlets. Furthermore, the group will have to invest heavily in order to build the brand awareness needed to drive sales. But as a play on management credentials and the strength of the Domino's brand and business model the shares are a BUY.

Key Data
Epic: DPP
Market: AIM
Spread: 67.5p - 70.5p

*The SF t1ps Smaller Companies Growth Fund, the ultimate owner of UK-Analyst, owns shares in Domino's Pizza.

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