Daily Stock Market Report (Tue 5th August 2025) - DOM, ZTF, SQZ, BP., MCON, DGE, YOU

Good morning!

Today's Agenda is complete. It's a busy Tuesday, which we've grown accustomed to!

Spreadsheet accompanying this report: link (last updated: 10th July) (work-in progress).

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Companies Reporting

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Graham's Section

Domino's Pizza (LON:DOM)

Down 14% to 211.39p (£827m) - Half-year Results - Graham - BLACK (AMBER/RED)

For many years I’ve perceived this as a fairly boring large-cap, with a high rating that was prohibitive for those of us who like searching for bargains.

However, perhaps that is changing.

For one thing, the market cap is now well below £1bn, suggesting that it has returned to mid-cap territory.

See how the share price has gone nowhere in 10 years - in fact it has fallen through the bottom of its 10-year range.

The P/E multiple has typically been in the teens or low 20s.

But that rating has grown cheaper as the market has apparently lost confidence in the quality of the company.

Note the downward trend in EPS forecasts:

And today we have a full-blown profit warning with the company’s half-year results.

Highlights from the H1 numbers:

• System sales +1.3% (£778m)

• Revenue +1.4% (£332m)

• Underlying PBT -14.8% (£44m)

These numbers don’t tell the whole story: like-for-like sales (i.e. focusing on mature stores) fell by 0.1%, with Q2 worse than Q1 at minus 0.7%.

11 stores opened, which was lower than expected: “franchisees cautious given increased employment costs”.

Despite falling profits, they still raise their interim dividend slightly to 3.6p.

New guidance: underlying EBITDA £130-140m.

Market share: up slightly, including a sharp gain in the UK pizza sub-sector to 53.7%. That seems positive to me, as I think it means the company is generally suffering from macro conditions rather than being out-competed.

CEO comment finishes confidently but first it lays out the bad news:

"Against a more difficult market backdrop, Domino's is significantly increasing its market share by offering great value, innovative products and even faster delivery times..

"There's no getting away from the fact that the market has become tougher both for us and our franchisees, and that's meant that the positive performance across the first four months didn't continue into May and June. Given weaker consumer confidence, increased employment costs and uncertainty ahead of the Autumn Statement, franchisees are taking a more cautious approach to store openings for the time being…

A second brand? They’d like to buy another brand, but haven’t pulled the trigger yet.

No opportunities under current consideration would require equity issuance

Whilst a second brand remains a core part of the strategy, if no acquisition announced by end of 2025, Board expects to resume share buybacks

Net debt is £307m, which gives a leverage multiple of 2.3x. I’d rate that as aggressive, although I think a company like Domino’s (capital-light and somewhat predictable) should be able to manage it. Their guidance for year-end is net debt of between £260-280m.

They don’t seem concerned about leverage given that they are hunting for acquisitions, might resume buybacks instead and, as I’ve already mentioned, have just increased their dividend.

Balance sheet: as a financially leveraged franchisor I’m not surprised to see that there is little balance sheet support. The position is a bit worse than it needs to be, however: equity is minus £83m or minus £220m if we remove intangibles from the equation. The company runs a negative working capital position which is a luxury. But as someone with value investor instincts, it doesn’t fill me with confidence to see a balance sheet like this.

Cash flow: there is no doubt that the core business is generating cash, but they are flying a little close to the sun for my liking. Interest is being paid out at £16m annually, and dividends are costing £42m. That’s a lot of outflows before we get into paying for anything else.

Cash generated from operating activities, after taxes paid, was £103.5m last year, and £37m in H1 this year.

New estimates: thanks to Panmure Liberum for publishing on DOM today.

They note that the midpoint of the new adj. EBITDA guidance is a 7.5% cut against prior expectations.

As for PanLib’s own estimates, they suggest adj. PBT this year of £94.4m (previous forecast: £107.7m), which is a 12% cut.

They also cut 2026 and 2027 PBT estimates by 13-14%.

Adjusted earnings per share estimates receive similar percentage cuts and the new EPS forecast for the current year is 18.4p.

At the latest share price, that puts the company on a P/E multiple for the current year of 11.4x.

Graham’s view

I must admit that I’m a tiny bit tempted by the new earnings multiple, as this is a business that I’ve always rated highly, but that has always been too expensive for me. So when I see it "on sale", I'm going to sit up and take notice.

It’s no longer expensive, but the trade-off for that is declining profitability.

If you believe the estimates, PBT is going to start picking up again very quickly, in 2026.

Let’s sum up a few positives and negatives.

Pros:

• Universally recognised brand

• Very high market share with majority market share in pizza takeaway.

• Capital-light franchise model. Should be highly profitable. ROCE 31% according to the StockReport.

Cons:

• Economic sensitivity to the consumer is producing some weakness in the short-term.

• Zero balance sheet support. An aggressive leverage multiple and highly negative net tangible assets.

• Impossible to predict whether the company will be able to successfully acquire and manage a second brand. At least it sounds as if they are not currently looking at any very large deals, if equity issuance would not be required.

In case you can’t tell, I’m on the fence on this one! On a long-term view, I do think it’s starting to look interesting, for investors who aren’t put off by the shaky balance sheet.

But using our framework which warns that profit warnings tend to be followed by more profit warnings, I’m going to have to go AMBER/RED on it today.

That’s only a one-notch downgrade, as Roland was AMBER on it last December.

I’ll have no problem upgrading it again once it’s clear that the position has stabilised.

The UK economy shrank in April and May, and I’m reminded of the bearish warnings we heard the other day from Next (LON:NXT) (which I own) that recent tax changes will dampen employment and consumer spending in H2. So I think we do need to weigh up the risk that further economic softness could hurt the likes of Domino’s in the second half of the year, and even the new estimates might be difficult to meet.

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Mincon (LON:MCON)

Up 5% to 33.45p (£72m / €83m) - Half-year Report - Graham - AMBER/GREEN

Mincon Group plc (Euronext:MIO AIM:MCON), the Irish engineering group specialising in the design, manufacture, sale and servicing of rock drilling tools and associated products, announces its half year results for the six months ended 30 June 2025.

I’ve wanted to be more positive on this one but haven’t quite managed to get off a neutral stance recently. The last time I wrote a full section on Mincon was in March.

Key points today:

• H1 revenue +9% (€74m)

• Gross profit +27% (€22m)

• Operating profit €4.1m (H1 last year: €0.2m)

• Profit €0.7m (H1 last year: €1m loss).

Well done to the company for finding “operational and sourcing efficiencies”. Along with volume recovery, this leads to a significant increase in gross margin.

Greenhammer: this has been years in the making, but at last there is a “cost per foot” contract starting in Arizona:

Our Greenhammer project is ready to deliver a yearlong cost per foot contract on a copper mine in Arizona. We have a team and service facility in place. This will be delivered in conjunction with our rig manufacturer partner and we are both optimistic about its future prospects.

CEO comment:

"I am pleased to report that the first half of 2025 showed a return to growth with higher revenue than the prior year but more importantly a significant recovery in our margins. This improved performance has been driven by increases in our construction revenues. This strong construction performance is due to a combination of our superior engineered product offering as well as onsite service support.

In conjunction with our improved sales, we have continued our focus on driving operational efficiencies across the Group, which is enhancing our margins and competitiveness.

Construction has grown from 36% of revenue in H1 last year, to 48% of revenue in H1 this year. Mining has moved in the opposite direction.

Outlook

The company’s improvement in margin is “ongoing”. They don’t provide an outlook statement specifically, but they do offer the following conclusion - and I appreciate the focus on ROCE.:

It is pleasing to see the progress that we are making in the first half of this year. It does demonstrate that our business is moving in the right direction to increase revenues and more importantly margins and ROCE.

The increased opportunity we see in construction should be supplemented by growth that our product development can unlock in mining and in time with renewables. We are building positive momentum, and we need to remain focused on improving our competitive position, while delivering on the opportunities we have worked so hard to create. I would like to thank our dedicated teams around the world for their continued efforts and look forward to brighter days ahead.

Cash/balance sheet

The company’s “balance sheet” section of the financial review barely doesn’t lead with any numbers, which is rarely a good sign. Investors are left to calculate net debt ourselves, and I come up with a figure of €23m. As of Dec 2024, the corresponding calculation is around the same.

Graham’s view

So, can I get this stock off AMBER? Yes, I think I’ll give it the benefit of the doubt.

Positives:

• Has shown it’s not dependent on the (highly volatile) mining sector, diversifying very nicely into construction.

• Improved margins give it a higher-quality profile.

• Management voluntarily highlights the importance of ROCE (not all management teams do this!).

• Greenhammer seems to be closer than ever to making a meaningful contribution.

Negatives? The main negative is that the debt picture is not ideal, but I think it’s manageable.

An interesting company that’s not particularly expensive and showing signs of life - AMBER/GREEN makes sense to me now.

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Roland's Section

Zotefoams (LON:ZTF)

Up 20% to 334p (£165m) - Interim Results & JV Agreement - Roland - GREEN

Given the strong H1 2025 performance and momentum carried into the second half, the Board now expects to deliver full year underlying profit before taxation ahead of current market expectations.

Record results and upgraded guidance from this specialist foam business have met with a positive – almost rapturous – reception today from investors.

The numbers are certainly positive and appear to provide strong vindication for the strategic shift CEO Ronan Cox has led since his appointment.

H1 highlights - here’s a summary of the key numbers:

• Revenue up 9% to £77.4m

• Operating margin improved to 12.2% (H1 24: 9.7%)

• Pre-tax profit up 37% to £11.4m

• Net debt down 35% to £29.1m

• Interim dividend +5% to 2.5p per share

I think there are two factors underlying the improvement in profits and margins this year.

One of these is the exclusion of the loss-making MEL (Rezorce) business, which was discontinued last year. In February, I modelled how this might affect Zotefoams’ profitability – doing this highlighted the affordability of FY25 forecasts, so I’m pleased to see this reflected in today’s results.

The other positive factor today is the evidence of genuine top line growth, which seems to have been driven by a mix of price and volume (credit to Zotefoams for making this clear):

• EMEA region: revenue up 11% to £61.4m, including 8% volume growth. This increase was largely driven by consumer sales. Much of this was driven by a 5% increase in demand from the group’s largest customer, Nike (NYQ:NKE), which is using Zotefoams’ ZoomX product in a growing range of its shoes. Revenue from the transport and construction sectors were broadly flat.

• North America: revenue rose by 10% to £14.5m, including 5% volume growth. Transport & Smart Technologies was the key contributor here, with sales up 49% to £8.8m thanks to a good performance in the aerospace and specialty packaging segments

• Asia: revenue fell by a third to £1.4m, but this region is currently seen as “an immaterial part of the Group”. However, it will become more important when the company’s new Vietnam factory opens – see below.

I think it’s worth remembering that the sales split above reflects where Zotefoams’ manufacturing operations are, not where the resulting end products are sold by the company’s clients.

Vietnam JV: In March, Zotefoams announced plans for a major new factory in Vietnam. Today we learn that the company has found a regional partner, Seoheung Co Ltd, who will contribute $10m in return for a 17.5% equity stake in this new subsidiary.

Seoheung is a regional footwear manufacturing specialist and will have the option to increase its ownership to 35% for an additional $14m investment.

This JV looks like a sensible arrangement to me, with potential benefits for both parties:

Seoheung brings decades of experience in the Asian footwear industry, including deep knowledge of Vietnam's manufacturing landscape. The partnership supports Zotefoams' strategic evolution from supplying traditional foam sheets to producing advanced 3D preforms for the athletic footwear market.

Zotefoams has also recruited a new Managing Director for Asia, Brandon Thomas. His previous role was at Nike, serving as General Manager for Asia, based in Vietnam, so he should bring much relevant experience.

Outlook: Zotefoams says it has “entered the second half with positive momentum” and supportive trends across its markets.

However, in H2 the company expects to see some moderation (a reduction?) in Consumer & Lifestyle demand due to seasonal factors – the exceptional growth rates seen in H1 are not expected to repeat.

Even so, today’s results have given Zotefoams’ board sufficient confidence to upgrade full-year profit guidance.

The company helpfully reminds of 2025 consensus estimates (revenue £149.7m, adjusted PBT £19.4m) but does not give any clue about the new expectations.

Sadly there are no updated broker notes available for Zotefoams today on Research Tree, so we’re flying blind.

However, applying a 10% increase to current year forecasts seems plausible to me. That would suggest a FY25E earnings per share figure of perhaps 32p, leaving the stock on a P/E of 10 or less.

Roland’s view

I was positive on Zotefoams in May, highlighting improved profitability and a positive outlook.

These results highlight the improvement in profitability I was hoping to see, with a return on capital employed (excluding MEL) of 15.8% for the last 12 months. That’s up from a group figure of around 12% previously.

Today’s earnings upgrade should strengthen the stock’s momentum scores. Despite a double-digit percentage share price gain today, Zotefoams still looks quite reasonably priced to me.

The main risks I can see relate to the company’s cyclical exposure to consumer markets and its heavy customer concentration.

Sales to the group’s largest customer (unnamed, but I think it’s ultimately Nike) totalled £37m in H1, or 47.8% of revenue (H1 24: 43.7%).

There’s no escaping that Zotefoams’ fortunes are closely-linked to this one customer. To my mind, this deserves a modest valuation discount. This leaves me with a choice as to whether to maintain my fully GREEN view from May, or step down one notch to AMBER/GREEN.

I’m tempted to downgrade, but on the strength of today’s improved profitability and earnings upgrade, I’m going to stay at GREEN.

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Diageo (LON:DGE)

Up %1 to 1,835p (£40.6bn) - Full year results - Roland - AMBER

Drinks giant Diageo has been a long-time Falling Star, suffering a decline that’s seen its share price fall to levels last seen almost 10 years ago. This is a remarkable decline for a company that was viewed as a high-quality defensive for so many years

The group recently ejected former CEO Debra Crew, appointing finance boss Nik Jhangiani as interim CEO. Apparently, a permanent CEO appointment is expected by October.

In the meantime, today’s results provide us with a chance to take the temperature of the business and check for any signs of a recovery in global booze purchases.

I think it’s fair to say that the news is mixed, at best:

• Net sales -0.1% to $20,245m

• Reported operating profit -27.8% to $4,335m

• Adjusted operating profit -0.7% to $5,704m

• Reported net profit -39.1% to $2,538m

• Free cash flow: $2,748m

Adjusted earnings fell by 8.6% to 164.2 cents, which appears to be marginally above the consensus estimate of 161c shown in Stockopedia.

The list of exceptional adjusting items totals $1.3bn and occupies a whole page. I don’t think it’s worth dissecting in detail here, but it probably is worth highlighting the $910m impairment charge.

The largest single item within this was a $458m impairment in Distill Ventures (a discontinued accelerator programme for new brands).

Aside from this, the firm’s Aviation American Gin suffered a $231m charge (around a third of the $610m paid for this celebrity-backed brand in 2020). Elsewhere, there was a $170m charge in respect of “various other US brands” and a $50m charge against Bell’s whisky.

This table showing the sales performance of key categories has very few bright spots except tequila (mainly Don Julio) and beer (mainly Guinness):

Geographically, volumes fell by 1.2% in North America and by 4.7% in Europe. However, there were some signs of recovery in Asia Pacific (vol +3.7%) and Latin America/Caribbean (vol +3.6%). Unfortunately, North America accounts for around 40% of group sales.

Balance sheet & cash flow: as Graham pointed out in May, Diageo’s leverage has overshot its previous target, forcing the company to adopt a new guidance range and an ambition to deleverage within three years.

Today’s results contain mixed news on that front, in my view.

Net debt rose slightly to $21.9bn last year, leaving Diageo with leverage of 3.4x adjusted EBITDA. This is within the new guidance range of 3.3-3.5x adopted in May, but well above the company’s longstanding historic target range of 2.5-3.0x. A return to these levels is targeted by FY28.

Cash generation has historically been strong here and last year’s free cash flow of $2,747m represents impressive cash conversion from net profit of $2,538m.

However, my sums suggest the increased dividend of 103.48c will cost around $2,337m. That leaves very little surplus cash to fund debt reduction.

One option may be to secure further disposals and cut costs – today’s results include guidance for cost savings of $625m this year, up from $500m previously. However, I’m not sure the extra cost cutting will make that much difference, especially given the time lag and cost of implementation such changes often carry.

Outlook & Strategy: perhaps understandably, there’s no change to the group’s core strategy. This seems to involve hoping for a recovery in spirits while working on new packaging and presentation options to try and capture market share in more modern categories.

Examples mentioned today include Guinness Microdraught and a new strategy for ready-to-drink products (e.g. spirits and mixers in cans).

The company has also included more detailed financial guidance for FY26 today:

• Organic sales growth similar to FY25 (+1.7%), with H2 weighting

• Improvement in operating margins, with mid-single digit operating profit growth

• Free cash flow of c.$3bn, aided by lower capex

Consensus forecasts prior to today suggest a 5% increase in adjusted earnings to 169c per share in FY26, pricing the stock on a P/E of 14.

Roland’s view

Diageo’s share price has fallen to a level where the dividend yield is now over 4.3% and the shares now boast a free cash flow yield over 5%.

This is a level where I’d normally see some value, given that this is a quality consumer business with 20%+ operating margins.

I’m not yet convinced about the value on offer at Diageo, though. One reason for this is that raised leverage means net finance costs are running close to $1bn per year. The dividend – which hasn’t been cut for over 20 years – leaves very little surplus cash for debt reduction.

Another potential headwind is the trend towards lower alcohol consumption and the wider use of weight-loss drugs.

I don’t know how likely it is that the recent decline in drinking will continue. But these trends do lead to a structural change in habits among a) younger drinkers and b) heavy drinkers, then they could result in a lasting change in profitability and growth potential for companies such as Diageo. Fund manager Terry Smith cited these factors when deciding to sell Diageo last year.

I’d consider myself as a potential investor in Diageo, but I don’t see enough in today’s results to tip the balance either way. At this point, I see this as a holding situation where the most sensible course of action is to maintain our neutral view.