PizzaExpress - The new proposition
All,
Please find our updated analysis of Pizza Express here.
Now that the bonds have been exchanged and the leverage is reduced, at least in gross terms, the situation looks clear enough for a new set of buyers. The all-cash yield is attractive, the FCF/Interest cover is fair, the company is stable, and surely the British consumer can’t go any lower - can he? If one day the outlook on Britain is at least stable, and a 12% cash yield in the base case is enough, and one is not already in PE Equity, then these bonds should be on the menu.
Investment Rationale:
- We remain long and wrong the equity following PE's last restructuring in 2021, and that is why we are not buying the bonds.
- Without an existing position in the equity, however, we would consider the bonds for their high cash yield. PizzaExpress is a stable business (at these low levels), and even in a scenario in which the company cannot raise sales idiosyncratically, some mild inflation (in revenue and cost) might just help the company grow into this new bond. 12% cash yield for leverage worth 75% of EV with no debt ahead is a fair proposition even in this market for a company that suffers no particular ailments. We don't know much about ratings, but the risk profile looks closer to a B than a CCC. The bonds should be close to an upgrade.
- 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.
Key Conclusions:
- Enterprise value covers the debt even in a no-recovery scenario for UK consumption (DCF).
- The business is stable, well-managed, and modestly profitable given weak macro demand. Reported figures are unlikely to improve meaningfully until consumption recovers (Current Trading). The attrition of the estate seems to have come to a halt, but internal levers are largely exhausted, and without said recovery in UK consumer demand, growth options remain constrained (Model).
- With shareholder support, Pizza Express has reduced debt by 18%. However, the higher coupon offsets this, keeping the interest burden broadly unchanged (Recapitalisation).
- The recapitalisation involves a par paydown and ~80% extension of maturities in exchange for increased coupons (Recapitalisation).
Summary:
- PE remains the UK's second largest branded casual dining chain by number of restaurants and still commands a dominating 28% of the ICD (Italian Casual Dining) segment within that. Consumer feedback continues to be among the most positive in the space, despite PE serving one of the scantest pizzas in the market.
- However, following a string of challenging market developments, featuring Brexit, Covid, Inflation and now Budget, British consumer confidence continues low and even though by comparison today's gross margin remains healthy - better than pre Covid even, UK and Ire Revenues themselves have not caught up with inflation (never truly recovered) and expenses have ballooned on business rates and labour cost inflation etc. to the tune of £35m p.a. which accounts for the difference between today's EBITDA and the £80m run-rate in 2021. The CVA relief following the restructuring has also come down now, adding to further pressure on EBITDA (note that we look at the company on a pre-IFRS-16 basis). Internationally, revenues per restaurant seem to have come down significantly in the last two years.
- To extend the capital structure out to 2029, the shareholders injected an additional £20m, which helped pay down the notes by £55m. The new notes, however, carry a larger coupon, keeping the interest burden unchanged. PE is run efficiently and moderately profitable. The shares are now little more than a four-year leveraged bet on the return of the UK consumer.
Here to discuss this name with you,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk