M&C Report talks to Prezzo chief executive Jonathan Kaye about expansion, La Tasca sites, the Mexican market, new designs and menus, Caffe Uno and food inflation. Expansion The company said its pipeline for openings over the next 18 months is “well-developed” and will see it open in Bristol, Bath and Manchester during the second half of the year. By the end of 2012 it anticipates opening approximately 25 new restaurants during the year and is fast approaching the 200 mark. Kaye said: “We will look to open a further 30 sites next year, of that I am optimistic that a third will be Chimichangas. We are in a position where are brands can go into a number of different locations, which makes allows us some flexibility on sites. We have hired David Street (former property director at Paramount Restaurants and current acquisitions consultant at Novus Leisure) to aid our rollout and I’m happy with how are pipeline looks for the next 18 months.” Kaye said that the group was looking at a few of the 22 La Tasca sites, which are being jettisoned by the group under a CVA. He said: “As with the Paramount estate there maybe a few there that we could do something with.” Mexican The group recently secured its 21st Chimichanga site in Amersham, has so far opened 10 sites under the brand over the last 12 months. Kaye said that the brand had certainly come of age helped by its offer and by the fact that it coincided with the country becoming more educated when it came to Mexican food. It has also secured a 22nd site for the brand in Ealing. He said: “Performance is in line with Prezzo and we are able to operate both brands in some locations without any impact on either’s trading. We will soon open a new menu for the brand and have slightly evolved the style and look of the format, with a recent example of this being at our Billericay opening.” Caffe Uno Kaye said that the group had converted two of Caffe Uno sites to Chimichangas but that the remaining two units operating under the brand were “performing well”, but that “our concentration going forward is on Prezzo and Chiminchanga”. Food costs Kaye said: “It definitely feels like it is on everyone’s mind at the moment and will be over the next year. We are in negotiations regarding our supply lines, but I can only see costs going up over the next 12 months, which will obviously have to take into consideration”. Analyst reaction Douglas Jack at Numis said: “H1 PBT is up 4% to £7.6m, which is slightly behind our forecast (£7.8m; no consensus) due to a slight reduction in average sales and a 100bps decline in EBIT margins during a challenging trading period for the company. We are cutting our forecasts by 1%, but our stance remains Hold. “We estimate average sales fell 1.5% in H1 (total sales up 14.3%; average number of restaurants up 15.8%) against tough comparatives due to the company being unable to recoup sales lost during a poor first six weeks to the year. “Prezzo’s site pipeline (covering openings for the next 18 months) supports 25 planned openings this year, of which 12 opened in H1. Of these, three were Chimichanga Mexican restaurants, which is now in 20 leisure/retail parks. This level of expansion reflects the good (25%+ cash) returns that are being achieved. “We are cutting our full year PBT forecast by 1% (to £17.5m from £17.7m; consensus £17.7m) which assumes no growth in average sales or margins in H2. This is fully offset at EPS level by the expected tax rate falling to 26% from 28%. “The shares trade at a 14% P/E and EV/EBITDA discount to The Restaurant Group (RTN) largely due to Prezzo’s limited liquidity and RTN’s recent operational out-performance. However, over the last three years, Prezzo has generated double RTN’s profit growth, partly due to a smaller starting position and partly due to superior LFL sales and margins. Both stocks are fairly valued, in our view.” Lindsey Kerrigan at Panmure Gordon, said: “We have reduced our Prezzo forecasts following yesterday’s interim results. Our 2012E forecast falls 2.5% to £17.5m (5.6p EPS) reflecting slightly weaker than anticipated H1 performance and the fragile consumer outlook for the remainder of the year but is in line with consensus expectations. The stock trades on a 2012E adj EV/EBITDAR of 6.9x, which feels appropriate given the earnings profile, and we reiterate our Hold recommendation and 70p target price.” Wayne Brown at Canaccord Genuity said: “Whilst the economic backdrop remains challenging, we believe that the maturing of sites, combined with a well invested marketing / promotional activity should underpin organic growth and margin recovery. Input costs though remain a long-term concern with EBITDA margins some 5ppts lower than its 2007 peak. Despite a tough H1 2012, we feel its South/South East bias combined with structural growth in the eating out market bodes well for future growth. The announcement also highlights the successful opening of its first transport hub location, and increased confidence in its secondary brand: Chimichanga which now stands at 20 sites. On the negative we are mindful that Prezzo is a high street brand where footfall is down around 7% on an annual basis. “However the fundamentals of the model remain strong with free cash flow building, these are likely to be directed towards increasing the roll-out and / or make selective bolt-on site acquisitions. We do not feel that Prezzo will increase its dividend ahead of the current 0.4% yield and excess cash is likely to be invested into freeholds which now equates for 16% of the estate vs. 13% last year. We have reduced our forecasts by 3% today to reflect what has been a challenging first half. We now forecast 6% PBT growth in 2012E growing to 10% in 2013E and beyond.”