PizzaExpress - Lean as Pizza - Initiation

All,

Please find our all new analysis of Pizza Express here.

Some decades favour consumers, others don’t. Back in the 80s, London restaurants were stagnating, and formats were ageing. Along came the (second half of) 90s and a plethora of new chains and formats sprung from the ground, resulting in the roll-out of new chains like PizzaExpress. For the last 15 years, however, the market has been stagnant, and even a well-run, dominant chain can’t grow. It feels like the economy needs another big reset, but that is not yet in sight.

Investment Considerations:

- We remain long and wrong the equity following PE's last restructuring in 2021. We are not about to buy the bonds in the 80s, however, even if technically we calculate them as almost covered.

- For PizzaExpress (PE) to make money for its shareholders the UK macro environment would have to swing as the company is otherwise well managed. The company is run as lean as its pizza and there is little management can be expected to do to improve revenue idiosyncratically.

A bet on time:

- Management don’t give much to complain about. We don’t see lavish spending or great bets on new roll-outs of formats that are failing. Operations seem as lean as the pizza they are serving. This management is all about execution of the main business and that it seems to be doing well.

- The Italian Casual Dining leader is the third most positively reviewed restaurant in the UK. Again, there is little to improve in product or service.

- LfL growth regularly exceeds that of its Italian-or-not Casual Dining peers, befitting a market leader.

- Investing in PizzaExpress is therefore not a bet on anything idiosyncratic that management can fix. Rather, it is a bet on time - on when the macro picture turns favourable again.

2025:

- The RCF matures in approx. one year, and the bonds six months later. So this is the year to address the balance sheet. However, since 2021 fixed costs have ballooned on NLW growth, business rates and now the end of its CVA negotiated rent, as well sheer cost inflation outrunning consumer disposable income.

- So a straight refinancing is out of the question. For that, the company’s £50m EBITDA are £30m short of the mark, requiring a 15% increase in LfL revenues to rightsize the business. We think, however, that shareholders could remain in control with only a minor cash injection to add a cash element to the re-issuance of a smaller SSN and the conversion of the remaining bonds into a new PIK note - not a loved instrument, but in return for a partial cash pay-down and foregone pain today, it could be an acceptable solution to enough bondholders, while allowing those participating in the new equity to increase their control of the business.

- The company has hired PJT.

Looking forward to discussing this name with you all,

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk