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AIMprospector

Prezzo keeps piling on the pounds Since listing, Prezzo has grown beyond the eponymous pizza restaurant chain. Today, Prezzo is a group of three restaurant brands: Prezzo, Chimichanga and Cleaver. Prezzo is one of AIM’s most successful ever roll-outs. The company listed on AIM in 2002. Its first financial results showed sales for the half-year of £1.2m and a portfolio of eight eateries. Recent full year results showed sales of £167m from a total of 238 trading restaurants. At the last finals, the group comprised 194 Prezzo, 37 Chimichanga (Mexican) and four units operating a new grill concept — ‘Cleaver’. Management expects to open another 25-30 restaurants across all three brands in 2014.

Management expects to open another 25-30 restaurants Prezzo’s success is no fluke. The company is run by Chief Executive Jonathan Kaye. Mr Kaye comes from a dynasty of UK restauranteurs. His father and uncle successfully rolled out the Garfunkels and Deep Pan Pizza chains in the 1980s. His cousins, Adam and Samuel Kaye, built and sold the ASK pizza chain to Pizza Express in 2004. His uncle, Philip Kaye, today owns 24% of the shares of another AIM-quoted restaurant roll-out play — Richoux Group. Roll-outs work by taking the profits from one successful site to pay for a site in another location and so on. Provided the concept is right and sites are well-managed, the profit www.aimprospector.co.uk

momentum can be extremely powerful as success snowballs. Prezzo’s net profit record shows this. In 2009, the figure reported was £10.1m. Four years later, net profit hit £18.5m.

profit momentum can be extremely powerful The company first declared a dividend for 2004. Since then, the payout has never been cut and has been increased seven times. Earnings per share at Prezzo more than doubled between 2008 and 2010. Since then, profit growth has slowed as sites have reached maturity. In the last three years, annual sales growth has averaged 16.7% a year. Earnings per share in that time has averaged 11.4% a year.

Chimichanga is being rolled out fast Now looks an appropriate time to reappraise the group’s prospects. First, you should note that Chimichanga is being rolled out fast. Last year, this chain numbered 28, twelve months before there were just fifteen. While there is little history of a Mexican chain enjoying success in the UK, this space is much less crowded than Prezzo’s home turf (Zizzi, Pizza Express, Strada) and management has been

making very confident noises about Chimichanga. The prospects for Cleaver are less convincing. Nando’s has become the de facto grilled chicken restaurant in the UK. I am unsure how large the opportunity for an upmarket grill is in the UK. I also worry for margins in that business as meat price inflation shows no sign of slowing. Double-digit earnings growth is forecast for this year and next. That puts the business on a 2015 P/E of 16.5. The forecast dividend means that the shares trade on a prospective yield of 0.2%. Although that stops Prezzo shares being an attractive income play, the momentum in the roll-out justifies continued capital investment rather than distribution. The valuation assumes that Jonathan Kaye’s success will continue. With his track record, I’d be reluctant to suggest otherwise. Prezzo (LON:PRZ) FOR Successful market-leader Growth potential remains AGAINST Competitive market Strong valuation Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£327m 138.75p:142p 18.3 0.2% 100p:165p

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June 2014 AIM Prospector  
June 2014 AIM Prospector  

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