Edmond Jackson's Stockwatch: Put this pizza chain in your ISA for Tasty returns

Is there space for yet another pizza and pasta, restaurant chain?

The stockmarket appears to reckon so, pushing the AIM-listed shares in Tasty up from about 25p in 2010/11, to 70p in 2012, then a re-rating near 125p by end 2013. The stock is now priced at 119p after its 2013 prelims.

Such a price is over 40 times the latest earnings per share although the price/earnings (P/E) ratio could drop significantly given scope to grow the income statement from a small base.

Pre-tax profit is only just over £1.7 million, the table shows encouraging revenue growth and the "Wildwood" - also "Wildwood Kitchen" - restaurants attract good customer reviews. They offer grills and seafood but a main pitch is pizza/pasta.

Generous rating

The group comprises of 24 Wildwood chains and six "DimT" restaurants with a range of popular oriental food.

Its shares' generous rating results largely from the involvement of the Kaye brothers, Adam and Sam, who founded and subsequently sold the Ask (previously AIM-listed) and Zizzi chains of Italian restaurants.

They own respectively, 15% and 18.3% of Tasty, and their father Peter founded Garfunkel's.

So there is a sense of proven owner-managers letting the public get a slice of their action via listed shares.

They have adjusted to the times: Wildwood offers "freshly prepared homemade Mediterranean cooking" - which looks good positioning as regards health endorsements for the Mediterranean diet and the appeal of comfort food at reasonable prices.

Favourable reviews

Nowadays any hotel or eating-out establishment falling short, is soon ripped to shreds on forums such as TripAdvisor, but Wildwood's customer reviews have generally been favourable such as: "We would definitely eat here again as it's hard to find places in central London that won't rip you off or make you feel like they are doing you a favour".

And another: "For quality and value this was very special... one of the best meals enjoyed in London (or anywhere!) within this category of style and offerings."

That came from a top contributor of 78 reviews in 28 cities. Meanwhile experiences in Cambridge are mixed similarly reviews of London Victoria Dim T are good overall.

The cut of reviews is, I suggest, key to the long-term prosperity of an emerging restaurant group.

Good momentum

2013 results show good momentum with revenue up 20% to £23.2 million helped by opening five new Wildwood (Kitchen) outlets, more in early 2014 "with a number of other sites in the pipeline."

It reflects the investor appeal of a successful branded concept in casual dining, with roll-out potential. Last October the company raised £2.5 million via a placing of shares at 100p to fund expansion and the end-2013 balance sheet shows cash up from £1.6 million to £3.4 million with only £1 million debt (mostly long-term).

Intangibles constitute under £500,000 versus £15.4 million for property, plant and equipment, i.e. some respite for a share price trading at a 270% premium to net tangible assets per share.

So, while there is investor appeal, be sure to appreciate that Tasty is a speculative share where the sense of "margin of safety" - the true measure of investment grade - amounts to the Kaye's track record than anything quantifiable in the financial results.

Detrimental impact

Also the statement's "principal uncertainties and risks" section cautions of "a high level of uncertainty" with the UK economic outlook.

"Deterioration in consumer confidence due to future economic conditions could have a detrimental impact on the group in terms of footfall and sales."

This is strictly true but examples such as PizzaExpress after the early 1990s' recession and Mid 250-listed Wetherspoon more recently have shown that good food, attractively priced, can win through tough times.

Property prices may be the main challenge: "The acquisition of suitable and well-located quality sites in order to continue the group's expansion is proving to be demanding."

Administrative costs nearly doubled to £944,000 although cost of sales as a percentage of revenue was reduced from 89.2% to 87.9%. Management expects food and labour costs to rise in the medium term.

Operational cash flow is strong, up 35% over £3.2 million, with £4.8 million investment aided by the share issue. Such a development profile explains the lack of dividends.

Complacency towards consumer-driven recovery

It's also possible to regard Tasty's 2013 re-rating as complacency towards the consumer-driven UK recovery with people running down savings and once again resorting to debt.

Certainly wage growth will be important before long. The group's market capitalisation is now 2.7 times annual revenues, i.e. potentially exposed. But if the overall reputation of the restaurants grows then I see upside on a 2 to 3-year view.

While volatility is possible the shares appear to be firmly held by Kaye followers who are likely in for the long haul and a trade sale eventually. So this share is worth being aware of as a long-term tuck-away in an ISA or SIPP.

I recall that Ask shares experienced times out of favour, traders could possibly wait for here, but the Kaye's delivered very well for their backers, hence it will likely need an upset in markets or the UK economy for Tasty to drop.

There is no group website so best derive your opinion from the restaurants (websites) and their reviews.