Report on Audit Committee's Opinion on the Acquisition of the pizza restaurant business under tradename "DOMINO'S PIZZA" - SET
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Report on Audit Committee's Opinion on the Acquisition of
the pizza restaurant business under tradename “DOMINO’S PIZZA”
The Board of Directors’ Meeting of Wow Factor Public Company Limited (“The Company”) No.5/2563,
held on 22 June 2020 has a resolution to approve Domino Asia Pacific Company Limited (the “Subsidiary”)
which is the subsidiary of the Company (the Company owns 9,997 shares or calculated as 99.99% of the total
sold shares of the Subsidiary) to enter into the assets acquisition transactions from the transfer of business of
pizza restaurants under tradename “DOMINO’S PIZZA” in Thailand from the previous owner, which is Dominos
(Thailand) Co., Ltd. and FC Commissary Company Limited. Also, in order to enter into transaction as a transferee
with exclusive right in opening, administering, and developing the pizza restaurant business under the
tradename “DOMINO’S PIZZA” both by itself or sub-license to other party in Thailand under the same system
and standard as “DOMINO’S PIZZA” in the United States of America by entering into Master Franchise
Agreement with DOMINO’S PIZZA INTERNATIONAL FRANCHISING INC. The details of the transaction and
opinion of the Board of Directors has already shown in IM1 of The Company.
The audit committee of the Company (“Audit Committee”) has examined the opinions of the Company’s
board of directors, and has no significant different opinion, which the Board of Directors and the Audit
Committee has opinion as follows:
1. Audit Committee carefully considered that a mentioned investment follows the Company’s
investment policy framework, which including investment characteristics, characteristics of invested company
and/or business, minimum rate of return, payback period and, risk evaluation on business to be invested in.
After the transfer of business, the Audit Committee will still follow up in order to confirm that the operating of the
business is still comply such frameworks.
2. Audit Committee consider all business risks based on its knowledge and past experiences from
previous food business that the Company had invested in, together with a risk assessment of the targeted
business based on the conservative approach and is of the view that even though this investment contains risks
from various factors, such risks are manageable. If the shareholders were to approve the investment, the board of
directors shall continue monitoring the existing risks and any other risks that may arise in the future and impose a
risk mitigation plan. This opinion is in the same way I V Global Securities Public Company Limited, an
Independent Financial Advisor ("IFA").
3. Audit Committee considers the benefits that the Company is expected from entering into this
transaction and is of the view that such transaction shall reward the Company with significant benefits towards its
operation as “DOMINO’S PIZZA” is a leading brand in both products’ standard and services providing and has
Page 1 From 12world class reputation. If the Company can achieve its goal in accordance with the business plan submitted to
DPI, this will significantly recover its turnover.
4. Audit Committee considers that the criteria in considering value of return and financial hypothesis is
based on the conservative approach and logic estimates. The transferee will make payment for the amount not
exceeding THB 426,612,000 which is a comprising of consideration for business transfer in an amount of THB
400,000,000 and interest in an amount of THB 26,612,000 (Firstly, the transferor requested the transferee to pay
full amount of THB 400,000,000 at 1 September 2020, the date that the remuneration and the date which transfer
of business is agreed. However, the Company could not do as transferor’s required since at that time the
company was negotiating the term and conditions of Master Franchise Agreement with DPI, there was an
uncertainty about the deal of business transfer. As aforesaid reason, the transferor then requested the transferee
to pay interest calculated based on 10% per annum of the unpaid remuneration, starting from the date that the
remuneration and the date which transfer of business is agreed (1 September 2020) until the transferor receives
the full remuneration. However, the company negotiated to cap the ceiling of such interest at THB 26,612,000
since the company estimated that the completion could take place on May 2020. Due to the fact that the
completion will be occurred on Q3 or Q4 of 2020 instead of May 2020, does not cause the company to have
additional interest burden in any way
However, as IFA is of the opinion that it is an investment that are unreasonable in terms of prices since it
higher that the fair prices evaluated by the IFA. Audit Committee considers the appropriateness of the whole set
of assumptions of the Company and IFA, and have an opinion that revenue is the only key assumption that causes
the fair value of this transaction to be significantly different. Board of directors have an opinion that the revenue
assumptions of the Company completely reflects business goals and strategies, and believe that the Company
has sufficient potential to meet the goals. Therefore, board of directors have an opinion that fair value estimated
by the company is reasonable.
Fair Value of business evaluated Fair Value of business The consideration of the
by the Company evaluated by IFA business transfer
475.67 – 535.51 million baht 139.58 – 344.92 million baht not exceeding THB
426,612,000
Audit Committee considered that the consider of the business transfer which is not exceeding THB
426,612,000 is lower than a range of Fair Value of business evaluated by the Company. The key reason behind
the different between Valuation by the Company and by IFA are as follows;
Page 2 From 12Valuation by the Company Valuation by IFA
Revenue Assumptions
The Company estimated revenue by following The IFA estimated revenue by following
assumptions: assumptions:
o 0.56 - 0.94 million baht per month per o 0.63 - 0.92 million baht per month per
branch between May 2020 - branch between 2020 - 2021
December 2021 o 1.37 million baht per month per branch
o 1.58 million baht per month per branch in 2022 onwards
in 2022 onwards o The IFA estimated BPO according to
Bill Per Order ("BPO") will grow according to the the Company’s projection.
inflation rate of 1.1 - 2.2 percent throughout the o The IFA estimated AWO between 2020
forecast, according to the inflation forecast of – 2021 by current AWO (April – May
Thailand by the IMF. Average Weekly Order 2020), similar to the Company.
Count ("AWO") will grow according to the However, for the AWO projection 2022
customer's access target each year. onwards, the IFA determined the
o The Company estimates AWO during growth of AWO by using the Same
2020 - 2021 by referring to current Store Sales Growth - SSSG at 5.5
average AWO estimates (in April and percent per year, based on the growth
May 2020), which is when the rate of sales from each of the stores at
transferee rearranges the marketing DOMINO’S PIZZA overseas (outside
plan by issuing promotions that are United States) during the year 2010-
more accessible, such as 1 free 1 2019.
promotion, pizza promotion for the
nation, Flash Sales 60% off, and
Combo Set Promotion.
o The Company estimates AWO during
2022 onwards, based on the average
number of times the existing
customers return to use the service
per year. With a goal of at least 4 times
Page 3 From 12Valuation by the Company Valuation by IFA
per year by 2030 is considered a very
low rate compared to the "DOMINO’S
PIZZA" in other countries, including
domestic competitors that is between
4.8 -9 times per year
The Opinion of Audit Committee
Audit Committee considered the appropriateness of revenues assumptions which are significantly
different, and divided 2 key variables into BPO and AWO. After comparing the assumptions of the
company and those of the IFA, board of directors have following opinions:
The assumptions of the AWO projection in 2020 - 2021, the Company and the independent
financial advisor consider using the current average AWO. (April and May 2020) as well. The said
AWO reflects the new marketing plan of the transferor that has been well received by customers.
(1) For BPO assumption, board of directors have an opinion that both the Company’s and
IFA’s assumption are not different and are in line with the specified business plan.
(2) For AWO assumption in 2020-2021, the Company and IFA consider using the current
average AWO (April and May 2020), which reflects the new marketing plan of the
transferor that has been well acknowledged by customers.
However, 2022 onwards, the IFA projected AWO growth by the same store sales growth rate
(SSSG) at 5.5 percent per year, which is different from the Company's assumptions.
By determining the assumption of AWO growth by the increase in the average number of times
the existing customers return to use the service per year, the AWO will be expected to grow by an
average of 15% per year. The company used the assumption that the old customers will return to
use the service more often and this will increase the frequency from the current level to 3 times
per year in 2023. After 2024, AWO will grow at a fixed rate of 4.6% per year (referring to the
growth rate of Gross Regional Product in Greater Bangkok between 2011 - 2018, where is the
target area to open DOMINO’S PIZZA’s new branches, the AWO will reach the peak and remain
stable after 2030, reflecting the frequency to use the service up to 4 times per year.
Audit Committee considered that the company has a clear strategy to increase AWO to meet the
target, and the 15% AWO growth rate during 2022-2023 is a market norm rate of the restaurant
Page 4 From 12Valuation by the Company Valuation by IFA
business in the country and is conservative when comparing to growth in turnaround locations. In
conclusion, the board of directors have opinion that the AWO assumptions of the Company is
reasonable.
Cost of Sales and Variable Operating Expenses Assumptions
80 - 82% between 2020 -2021 79.8 – 82.0% between 2020 -2021
68 - 69% from 2022 onwards 68.4% from 2022 onwards
It can be divided into 2 main parts which are The IFA projection is based on the budget plan
cost of sales and variable operating expenses prepared by the management of the company.
which has the estimated details as follows:
o The cost of sales consists of raw
materials, packaging, and delivery
costs. During 2020 - 2021, the
Company estimates that the cost of
sales is still higher than the historical
average. Due to “DOMINO’S PIZZA”
still has to try to focus on aggressive
marketing as a result of the outbreak of
COVID-19. However, after the situation
improved in 2020 with research and
product development to be accepted
by customers and manage product
costs in accordance with the selling
price. The Company believes that
product cost management and saving
on size due to having more branches,
the Company will be able to reduce
the cost of sales to be in a competitive
framework.
Page 5 From 12Valuation by the Company Valuation by IFA
o Variable operating costs Most of which
are royalty fees, revenue sharing fees,
and product delivery fees for
employees. LSM marketing expenses
such as distributing flyers, other
expenses etc. Due to the variable
operating expenses has increased
from (1) As “DOMINO’S PIZZA”
focuses more on product delivery,
the Company expects the proportion
of delivery sales will increase to a
maximum of around 35 percent from
about 20 percent in the first quarter of
2020 which is the proportion that
“DOMINO’S PIZZA” used to do in
2018, which has a higher proportion of
delivery orders, this will result in a
higher share of revenue, and delivery
fee for staff in each round.
(2) “DOMINO’S PIZZA” has a strategy
to increase distribution through other
channels which has additional costs
(3) “DOMINO’S PIZZA” focuses on
LSM marketing together with online
marketing to reach community
resources which will increase
marketing expenses in the future.
The Opinion of Audit Committee
Audit Committee considered the appropriateness of cost of sales and variable operating
expenses assumptions and had an opinion that assumptions by the Company and the IFA are not
Page 6 From 12Valuation by the Company Valuation by IFA
different and are based on the conservative basis, which are consistent with the business plan.
Therefore, board of directors have an opinion that the assumptions of cost of sales and variable
operating expenses by the company are reasonable.
Fixed operating expenses
0.32 million baht per month per branch 0.32 million baht per month per branch
Most of which are employee costs, rental cost, The IFA projection is based on the budget plan
utility costs, maintenance fee, online marketing prepared by the management of the company
expenses, etc. The Company estimates fixed (except rental and inflation rate increases). The
expenses based on the 1st quarter of 2020 and company estimates fixed expenses based on
the expenses specified in the MFA contract figures from the first quarter of 2020, but IFA
which will grow according to the inflation rate of grow by the inflation rate at 2.02% throughout
1.10 - 2.20 percent throughout the forecast the forecast, referring to the average inflation
according to Thailand's inflation forecasted by rate of the past 20 years in Thailand
the IMF For rental expenses, IFA’s projection is based
on 27 existing contracts and grows by 3.30%
every year, with the assumption that the
company will renew the contract throughout the
projection period. The costs related to the MFA
contract shall be as specified in the agreement.
The Opinion of Audit Committee
Audit Committee considered the appropriateness of fixed operating expenses assumptions and
had an opinion that assumptions by the Company and the IFA are not significantly different.
Therefore, board of directors have an opinion that the fixed operating expenses assumptions by
the company are reasonable.
Office operating expenses
3.15 million baht per month which will grow 3.07 million baht per month
according to the inflation rate of 1.10 - 2.20 The IFA projection is based on the budget plan
Page 7 From 12Valuation by the Company Valuation by IFA
percent throughout the projection from the prepared by the management of the company
inflation forecast of Thailand by the IMF. (except rental and inflation rate increases). The
The Company has considered the increase of IFA used the inflation rate at 2.02% throughout
support personnel in various departments such the forecast, referring to the average inflation
as marketing, human resources, technology, rate of the past 20 years in Thailand
accounting and finance, strategy and operation For rental expenses, IFA’s projection is based
support and Call Center Department, about on existing contracts and grows by 3.30%
4 - 10 people for each department to be able to every year, with the assumption that the
support the ability to open new branches company will renew the contract throughout the
projection period.
The Opinion of Audit Committee
Audit Committee considered the appropriateness of office operating expenses assumptions and
had an opinion that assumptions by the Company and the IFA are not significantly different.
Therefore, board of directors have an opinion that the office operating expenses assumptions by
the company are reasonable.
Central kitchen operating expenses
1.10 million baht per month during 2020 - 2021 0.99 million baht per month
and 0.86 million baht per month from 2022 The IFA projection is based on the budget plan
onwards, which will grow according to the prepared by the management of the company
inflation rate of 1.10 - 2.20 percent throughout (except rental and inflation rate increases). The
the projection According to Thailand's inflation IFA used the inflation rate at 2.02% throughout
forecast by the IMF. the forecast, referring to the average inflation
rate of the past 20 years in Thailand.
For rental expenses, IFA’s projection is based
on information from the Company that the rental
expense is expected to decrease, and will
grow 3.30% every year, with the assumption
that the company will renew the contract
Page 8 From 12Valuation by the Company Valuation by IFA
throughout the projection period.
The Opinion of the Audit Committee
Audit Committee considered the appropriateness of central kitchen operating expenses
assumptions and had an opinion that assumptions by the Company and the IFA are not
significantly different. Therefore, board of directors have an opinion that the central kitchen
operating expenses assumptions by the company are reasonable.
Capital Expenditure Assumptions
Approximately 4,500,000 - 5,500,000 baht per Capital Expenditure is projected based on the
branch, referring to the actual expenses in the budget plan prepared by the management of
past, consisting of building improvements, the company, approximately 4,500,000 -
kitchen equipment, furniture and fixtures, 5,500,000 baht per branch. The IFA projected
software systems, franchise fees and other Capital Expenditure in 2021 which is 5.17
expenses. The new branch is expected to have million baht, and used the inflation rate at
an area of approximately 111 square meters. 2.02% throughout the forecast, making Capital
Approximately 40,000,000 - 80,000,000 baht, Expenditure are 5.17 – 6.01 million baht
which is an investment to improve the Other investments are 34 million baht, including
production efficiency of FC Commissary the production’s improvement, and other
Company Limited, consisting of building improvement after the transaction.
improvements, kitchen equipment and
production equipment, furniture and fixtures,
software systems and other expenses in order
to be in line with the business plan, including
investment funds for website improvement.
The Opinion of Audit Committee
Audit Committee considered the appropriateness of capital expenditure assumptions and had an
opinion that new location capital expenditure assumptions by the Company and the IFA are not
significantly different. However, for other investments, the Company estimated that the central
kitchen is required a new production base instead of the current one, which is different from the
Page 9 From 12Valuation by the Company Valuation by IFA
assumptions of IFA that it is required to improve the production efficiency at the current location,
not moving to a new location. As a result, the Company’s investment is slightly higher which is
more conservative than IFA’s assumptions. Therefore, board of directors have an opinion that the
capital expenditures assumptions of the company are reasonable.
Discount Rate
Weighted Average Cost of Capital (“WACC”) at WACC = 9.28%
9.11%, by using Interest rate of long-term Based on Risk Free Rate and Market premium
government bonds, 30 years and average SET from 20 June 2015 to 19 June 2020
Total Return Index (TRI Index) for 30 years
The Opinion of Audit Committee
Audit Committee considered the appropriateness of discount rate assumptions and had an
opinion that assumptions by the Company and the IFA are not significantly different. Therefore,
board of directors have an opinion that the discount rate assumptions by the company are
reasonable.
Fair Valuation
475.67- 535.51 million baht 139.58 – 344.92 million baht
The Opinion of Audit Committee
Board of Directors considered the appropriateness of the whole set of assumptions of the
Company and IFA, and have an opinion that revenue is the only key assumption that causes the
fair value of this transaction to be significantly different. Board of directors have an opinion that the
revenue assumptions of the Company completely reflects business goals and strategies, and
believe that the Company has sufficient potential to meet the goals. Therefore, board of directors
have an opinion that fair value estimated by the company is reasonable.
5. Audit Committee considers the opinion of IFA in the topic that the business will bear the operating
loss of “DOMINO’S PIZZA” for a long time, although the business transfer of all 27 stores of “DOMINO’S PIZZA”
shall generate revenue for the Company immediately, the business of “DOMINO’S PIZZA” is projected to have
Page 10 From 12operating losses in the range of THB 11.83 million –THB 115.07 million The Company will start to have operating
profits (EBIT) after the 5th year after the investment. However, the Company projected that in the first stage of
investment “DOMINO’S PIZZA” will have operating losses in the range of THB 11.02 million –THB 114.96 million
and will start to have operating profits (EBIT) after the 4th year after the investment.
Audit Committee considered that EBITDA, or earnings before interest, taxes, depreciation, and
amortization, a key ratio when considering this deal since it is a measure of profitability. The company projected
that the EBITDA of such business will be positive in the 3rd year after the investment.
During the year 2020-2021, the company will focus on research and development of products,
bringing various technologies to facilitate the purchase method, as well as performing product cost management
in order to make it in accordance with the selling price and, rebranding brand to become more Neighborhood
Restaurant. By doing these, the Company confident that the company will be able to reach the performance as
targeted.
In addition, due to the Company's forecast is based on conservative basis. If the actual operation
can be done better than expected, the profit will be seen in a shorter time period than the company estimated. In
case that an aforesaid asset acquisition transaction approved by the Company Shareholder, Audit Committee Will
follow up for the management to do the best effort to achieve goal as plan
6. Audit Committee considers the opinion of IFA in the topic that the Company has paid a relatively
high proportion of deposits and there are interests being charged only for the Company. There is also a concern
of not being to retrieve the deposit immediately If the transaction does not occur. The board of director carefully
considered by weighing between the expected benefits the company will receive and the resources that the
company has to use for this investment, including various conditions that the company has to perform in order for
this investment to be successful, and agreed that this deal is reasonable.
Finally, it should be noted that, the company had used all effort to negotiate with the transferor in order
to reduce risk and make the best benefit to the company, including but not limited to, 1) the Company has
negotiated the deposit for the transfer of business in the amount of not exceeding 100 million baht. A refundable
deposit is placed in case the status of the business is not satisfactory. However, based on the management's
consideration, the Company can ensure that the Company can reclaim the funds without dispute on the results of
the due diligence. Therefore, the Company negotiated and changed the agreement from deposit to loan with no
interest 2) To cap the ceiling of consideration at THB 426,612,000.
Moreover, the offer to invest in a world’s leading brand as “DOMINO’S PIZZA” may not come so often.
As such, if said investment follows and within the scope of an investment policy framework where its risks is
manageable and in a long run rewards benefits to the Company, with all aforementioned reasons, Audit
Page 11 From 12Committee of directors approves such investment and shall present aforesaid information for an approval for this
investment from the Company’s shareholders.
Please be informed accordingly.
Yours faithfully,
Mr. veerayooth Bodharamik
Chairman of Audit Committee
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