A tasty pasta snack for PizzaExpress at pounds 6m

Investment Column
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The Independent Online
PIZZAEXPRESS served up an intriguing dish for investors with yesterday's acquisition of Cafe Pasta. At first sight, spending pounds 6m on just eight all-day pasta-based cafes may look a bit expensive and this is perhaps behind yesterday's small fall in the share price to 854p.

But the logic behind the deal is sound. The pizza market cannot expand forever and with more than 170 restaurants nationwide and a few planned for abroad, PizzaExpress's growth is set to slow down in coming years.

The next best thing is to branch out into a similar market, with the same type of customers and a promise of high margins thanks to lower material and labour costs. The plan to keep Cafe Pasta as a separate brand from both PizzaExpress and its Pasta Milano eateries should also help to avoid customer confusion.

The main doubt over the strategy is its aggressive roll-out programme. Plans to open more than new 50 Cafe Pasta outlets in the next five years, in the middle of what could be a severe economic downturn, could dampen earnings.

Chairman David Page was yesterday adamant that the company was not biting off more than it could chew, pointing to the obvious synergies in terms of buying power and marketing between the existing operations and Cafe Pasta.

For the moment investors should give PizzaExpress the benefit of the doubt. Its pizzas may be a little on the soggy side at times, but its corporate strategy has always been quite firm, with recent earnings growth comfortably in the 20 per cent bracket. The multiple of 25 times broker Credit Lyonnais Securities' 1999 profit forecast may look high, but past form and future prospects suggest they are still a good bet. Hold

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