PizzaExpress becomes too spicy for investors

Vernalis; Albemarle & Bond
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The Independent Online

PizzaExpress, the pizza and pasta chain, launched its first-ever advertising campaign late last year, conceding that its "word of mouth" policy was not enough to drive sales in the face of competition from clones such as Ask Central and Signature's Strade. But the new media savvy may not be enough to keep investors tucking in to the shares as the group, like its customers, begin to feel the pinch of tougher economic times.

The usual tasty ingredients were missing from yesterday's interim results, which arrived topped with the news that PizzaExpress's chief executive, Ian Eldridge, had thrown in the pizza apron. His departure comes just months after Glen Tomlinson, the current finance director, announced his own resignation, prompting investors to question the company's previously impeccable management credentials.

Also unpalatable was a declining trend of year-on-year underlying sales growth in the half year to 31 December. The 3 per cent rise in like-for-like sales in the pizza restaurants compared with a 10 per cent gain the year before, while over at Café Pasta, underlying sales fell by 1 per cent against an 18 per cent surge a year earlier.

The declines reflected the group's London bias – 45 per cent of its UK restaurants are within the M25 – and the dearth of tourists to prop up sales in the capital. With belt-tightening consumers expected to cut down on luxuries like eating out this year, margins – which fell in the core pizza business – will remain under pressure.

PizzaExpress's international expansion has again failed to impress. Yesterday the group confirmed it was pulling out of the US, taking an exceptional charge of £700,000 to cover the closure of two restaurants. A substantial acquisition in France is on the group's 12-month menu, but it needs to hurry up and invest its £27.5m cash pile rather than leave it languishing in the bank.

Pre-tax profits for the period before the exceptional charge rose 12 per cent to £21.8m on sales up 16 per cent to £103.8. The stock, down 22.5p to 807.5p, trades on a forward price/earnings ratio of 18 times, which is far too spicy. Sell.

Vernalis

Getting Frovatriptan, a new migraine treatment, on to the market is proving a huge headache for Vernalis, the Berkshire-based biotech company. Although the drug finally has regulatory approval (at the second attempt) in the US, the launch has been delayed until at least April as Elan, the Irish company in charge of selling the drug, tries to find a marketing partner. There have been worrying signs that Elan is no longer as ambitious for sales of Frova as it once was. With the launch in Europe also stalled, analysts have been downgrading sales forecasts in recent weeks. ING Barings, which abandoned its "buy" rating on Vernalis yesterday, now reckons Frova will have peak sales of only $105m a year.

This is all very important because every new delay pushes back the point when Vernalis begins to receive royalties. At the current burn rate, Vernalis has probably little more than a year's money left, a fact that will increasingly dog the stock in the months to come.

Since it has only one other drug in clinical trials – a treatment for sexual dysfunction among users of anti-depressants – Frova is disproportionately important to the company's market value.

The company said yesterday that it is extending its collaboration with Roche over new drugs to combat obesity. Roche, one of the world's biggest pharmaceuticals companies, is set to begin human trials of one Vernalis compound which affects how full its users feel after eating. Now, Roche has agreed to pay Vernalis to work on another series of compounds showing similar promise. The news sent Vernalis shares up 10p to 151p, but it is likely that the newsflow will be less positive for much of the coming year. Sell.

Albemarle & Bond

Pawnbroking is big business, and Albemarle & Bond has doubled its number of branches in recent years to capitalise. Results yesterday saw profits up 53 per cent to £1.8m in the six months to 31 December. Albemarle's average loan, secured on gold jewellery, is £70, and 85 per cent are redeemed, but the growth has come from increasing its customer base and repeat business. The group has also been rolling out other forms of lending, including cheque cashing and pay packet advances.

The 25 newest of its 50 branches, opened in the past four years, so far account for just a quarter of the group's total loan book and should generate continued growth. Investors have little to fear from an economic downturn, since pawnbrokers can be expected to benefit as customers get strapped for cash.

Albemarle also squeezed a 24 per cent rise in jewellery sales by taking a more professional approach to retailing. It bought in new jewellery to sell alongside the pawned stock, attracting price-conscious consumers as a result.

With 45 per cent earnings growth forecast this year and 18 per cent next, Albemarle still looks cheap on 10 times 2002 earnings. Up a penny to 65.5p yesterday, the stock is a buy.

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