Pizza Express - Change of Heart and exit

All,

We are having a change of heart on Pizza Express and are exiting our position in the SSNs. As we made further allowances for the Coronavirus this morning (Our updated analysis since yesterday is here.) the headwinds stack up as follows:

2020:

- 1.5% LfL in the UK, feathered by margin and business improvements (good management)

- NLW, Business Rates and other UK cost rises (£-15m)

- Diminishing capacity to feather NLW and business rate impact (£+5m)

- Slower than expected turnaround of the International division, which for 18 months we have each period revised and postponed

- COVID19 (£-5m)

=> £60m EBITDA in 2020. 

2021:

- Lack of cheap foreign labour following withdrawal from the EU could ad further cost of sales in 2021 (£-7m). 

=> £55m EBITDA in 2021.

Cash Flow:

- CapEx requirement to refurbish the UK estate and bring the international division (don’t close it!) to scale should bring unlettered FCF down to £20m p.a. for a while.

=> Thus only minimal debt capacity at the moment.

Valuation:

=> EV = £315m = 6x forward, due to low / negative growth and weak debt capacity - in line with DCF

=> SSN cover = 70p/£ before considering restructuring costs, but after injecting incremental £30m of cash.

We like Pizza Express as a business, but our outlook for the year has soured considerably. We will continue to monitor the name for a well timed investment. 

Wolfgang