Pizza Express

All,

Pizza Express did not present any news on a possible restructuring today, but nonetheless seem to be due in H2 of this year as business is FCF neutral and at best remaining so for the foreseeable future. Given coupon has just been paid, the company may be able to grind along until Brexit has been resolved one way or the other. From Hony’s perspective, this could either hand them a good excuse for the failure of the investment, or it could raise the prospects of the UK business, its valuation and thus any party's willingness to consider some sort of deal. Thus we do not anticipate to hear from Pizza Express until November, when Q3 results are due, which should also give time to restructure by Feb 20.

Specifically we have learned that the UK business has seen some 70bps of margin pressure in H1 due to HQ restructuring etc, that are due to reverse. This however should only about offset a decline in international EBITDA of £1.5bn from the discontinuation of two key HK sites (including the airport). The £20m RCF was £3m drawn in August to make the coupon payment and we are not foreseeing the business returning to anything more than NCF neutral through the next coupon date. Thus without a resolution on Brexit, the grind may take even longer. The RCF however runs out thereafter, forcing a solution by this time next year.

In the context of the restructuring the SSNs remain in the money under virtually any conceivable scenario. However, they may well drop a coupon in the process and would have to provide at least £100m of fresh cash.

We remain invested in the currently fairly valued SSNs and look forward to investing further on any dips or with any announcement of an approach by Hony.

Wolfgang