The Investment Column: PizzaExpress still looks tasty

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PizzaExpress has proved to be a mouth-watering investment over the last five years. Its posh pizza restaurants have continued to pick up a bigger slice of the market from downmarket rivals and the company now owns and operates 153 outlets plus eight franchised restaurants and sells a staggering 10 million pizzas a year.

Yesterday PizzaExpress produced another dream topping with pre-tax profits for the six months to December up 49 per cent at pounds 9.4m. The strong set of interim figures benefited from a full contribution from 32 previously franchised restaurants that it mainly acquired in November 1996. Although the results did raise one concern. Margins in the existing restaurants fell over the period from 20.4 to 19.7 per cent due to exceptional staff and training costs. But the margins squeeze did not stop the share price jumping 35.5p to 721.5p yesterday, helped by a 24 per cent increase in the interim dividend to 1.05p.

However, the biggest worry for investors is that this rapid rate of growth could slow down. With half of the profits and turnover still coming from outlets inside the M25 ring road, the group has scope to open plenty of new sites throughout the country. But the rate of expansion in the UK is likely to slow within a few years.

PizzaExpress' long-term growth will depend on its ability to expand overseas. Can, for example, the group make a success of selling pizzas to the Italians or crack America, the biggest pizza market in the world? The company believes saturation will not happen in the UK until the early millennium and by then the overseas business will be ready to take over.

However, expansion abroad is still in its infancy. Sites have opened in France, India, Cyprus and soon Russia. But it is unclear how profitable these ventures will be and how fast the group will be able to expand in each country.

The share price has fallen 15 per cent since last December after several directors sold their stock and City whiz kids, Luke Johnson and Hugh Osmond, took a back seat to concentrate on their other business interests. Even so, the shares are still highly rated. UBS, has downgraded full-year profits by pounds 1m to pounds 22.3m, putting the shares on a multiple of 28-times forecast earnings. That said, investors should hold on, as PizzaExpress has rarely disappointed in the past and could still prove to be a very tasty investment if overseas expansion takes off.