Numis has set a target price of 70p for Prezzo, the Italian restaurant chain led by Jonathan Kaye, with like-for-like sales expected to be positive but margins flat.
Issuing an Add recommendation for Prezzo, Numis said the company, which is due to announce its interim results on Wednesday (7 September), could be “vulnerable” if consumers cut back, with an average spend per head of £16.70 at its sites.
However, there was “little evidence” of this in the last recession, during which Numis estimates average sales increased by over 10%.
“LFL sales are unlikely to be disclosed, but they should be positive given the good start to the year, easy World Cup comparatives in June/July and ongoing progress with site development (new sites are larger; refurbishments are performing well) and online marketing.”
Prezzo should also have been “relatively less affected” by the August riots “given its orientation towards smaller towns”.
However, food cost pressure should now be increasing, the note adds. “Food cost inflation was running at 2%, but as hedging contracts expire, the pace of cost inflation should pick up.”
Utility costs have been locked in for 2011 at a 2% lower rate, Numis said.
“We would expect cost inflation to largely be passed on to customers. Aided by expansion and benign labour, rent and utility costs, we forecast margins to be flat in H1.”
Numis added: “Overall, we expect to at least hold our forecasts (FY11E PBT £16.1m; consensus £16.0m) which cautiously assume a slight reduction in LFL sales in 2011E and a continuation in the company’s trend of opening 20 and closing three sites pa.
“The valuation of 10.8% equity free cash flow yield (6.3x EV/ebitda) for a debt-free restaurateur (of which 10% of the estate is freehold) is not strenuous, in our opinion, given that 13% self-financed earnings growth is forecast for this year (with no reliance on LFL sales/margins growth).”
