A couple of appetising prospects

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The Independent Online
BRITAIN'S middle classes are discovering the joys of eating out in restaurants. Two groups well placed to benefit are PizzaExpress at 206p and Chez Gerard Group at 199p. Both look likely to have grown into much bigger businesses by the end of the decade. Investors should climb aboard now.

Many will be familiar with PizzaExpress, which offers traditional Italian pizzas according to a format created by chairman Peter Boizot in 1965. It is a world away from the fiercely discounted mass-market pizza chains such as Pizza Hut and Pizzaland, and if anything is moving further upmarket.

A helpful feature for both restaurant groups is greatly increased flexibility to offer bar areas as well as restaurants. .

Two trends are promising for PizzaExpress. One is the sheer buoyancy of trading. Hugh Osmond, executive director, said he expected 1995 to be good, but it is turning out even better. At its annual meeting recently, it reported that sales were ahead by 30 per cent in the opening months of the year at the company-owned restaurants that provide the bulk of group profits. Like-for-like growth at restaurants open for less than three years was running at around 15 per cent, with even mature restaurants seeing 10 per cent growth.

The other powerful boost was coming from a better-than-budgeted performance by new restaurants. PizzaExpress currently has 90, of which 53 are company- owned and 37 franchised. Restaurants have been opened in the past 12 months in Leamington Spa, Guildford, London's Belsize Park and Newcastle; second restaurants in Birmingham, Dublin, Bedford, York and Streatham, London. Normally, the group expects new restaurants to lose money at least for the first six months. All but one of these restaurants is already trading profitably, which is a good omen for prospects and will encourage the group to maintain a strong opening programme. The expectations is that 15 to 20 new restaurants will be opened annually, financed from cash flow, for the foreseeable future. The group is also buying back franchised sites.

The medium-term outlook is equally good. Mr Osmond says that in a few years there could be 250 PizzaExpress restaurants in the UK. The implications for physical growth are striking, because most of them will be the more profitable company-owned units. Numbers here could roughly quadruple to 200, fuelling pro rata or even better growth in sales and profits.

Surprisingly, stockbrokers Greig Middleton, though broadly positive on the company, advise taking profits in the short term. On their forecasts for profits rising to pounds 8m followed by pounds 9m, for the years to end-June 1996 and 1997 respectively, the prospective price-earnings ratio is not much below 20. .

My hunch is that both forecasts, especially the latter, are going to be beaten and that the strong trading and prospects will make purchases rewarding even at current levels.

Groupe Chez Gerard , run by Neville Abraham and Laurence Isaacson, is a smaller and more varied chain than PizzaExpress, so far totally focused on London, and more acquisitive.

The pair first discovered an aptitude for running restaurants when they founded the Cafe des Amis du Vin, which was subsequently sold to the hyper- acquisitive 1980s restaurant group, Kennedy Brookes. Mr Abraham and Mr Isaacson did not stay long with KB, which they say was more about building up a property group, whereas Chez Gerard is about running restaurants efficiently and attracting customers with a pleasant ambience and value- for- money food. The image is upmarket, but there is not a huge difference in cost between a meal at PizzaExpress and the set menu at one of the four Chez Gerard restaurants.

Floated with six sites last spring, the group now owns nine central London restaurants plus a share in the Chelsea-based Indian restaurant, Chutney Mary. The chain includes the recently renamed Chez Gerard at the Opera Terrace, two Bertorellis, Cafe Fish, Soho Soho and Scott's in Mayfair, described by Mr Abraham as once the most glamorous restaurant in London. The newly acquired locations add 23,000 sq ft of space in prime London positions (north Soho, Covent Garden and Mayfair) to a group that floated with 20,000 sq ft.

Trading is going well and there are ambitious plans to refurbish and revitalise the newly acquired sites, while improving earlier locations. Organic growth will come from rolling out such proven concepts as Chez Gerard and possibly Bertorelli.

Significant acquisition is also likely. On forecasts of profits reaching pounds 2.9m and pounds 3.7m for the next two years, against just pounds 420,000 in 1991, the p/e is set to fall to the mid-teens, and the shares look an exciting investment. Shareholders also receive vouchers for house wine.