No Pain No Gain: 'From the 1960s Golden Egg, a promising Prezzo has hatched'

I came across the catering Kaye family in the 1960s when it ran a chain of what could be described as upmarket greasy spoons. Their Golden Egg restaurants arrived in the City to the accompaniment of old-style razzmatazz, with stock jobbers, these days masquerading as market-makers, sporting chef's hats and aprons as they cut first-day deals on the late-lamented stock-market trading floor.

Then came the inevitable takeover bid and Golden Egg was swallowed by, I think, EMI, that now concentrates on music and is attempting a major transatlantic swoop.

The Kayes are key players in a planned restaurant merger that would put many top names in the control of one group. After the sale of Golden Egg, the family created City Hotels, also the subject of a successful bid, then what is now City Centre Restaurants, taking in such chains as Garfunkel's and Frankie and Benny's. More recently, they rolled out the highly successful AIM-traded Ask Central spread of Italian restaurants. This week the stock market was more than a little surprised when City Centre and Ask disclosed they were in merger negotiations.

But even as the talking starts, the family has other menus on its collective mind. It is developing another quoted meal ticket that is still outside the merger aspirations. It is called Prezzo and, if memory serves correctly, represents the Kayes' fifth stock-market restaurant play. In a particularly low-key flotation, its shares arrived in March last year, trading at around 90p and then topping 120p. They have since been as low as 22.5p. A roller-coaster ride, even by small- cap standards.

When it joined the ranks of the quoted, Prezzo had just four restaurants. By September, its chain had grown to 22, with a further six in development. But it does not stand on ceremony when it finds itself with a dud. Three of the 22 have not come up to scratch and are being closed, forcing exceptional write-offs.

In Prezzo's first half-year, it achieved profits of £305,000 from sales of £4.2m. Trading in the previous full year produced an £86,000 loss although the company was in profit at the half-way mark. On the surface, the group looks set for a bumper year. But expansion costs and the bill for shutting the three under-achieving outlets will have to be accommodated. Even so it will be surprising it does not produce a tasty performance.

Only one Kaye is on the board, Jonathan Kaye, the managing director. Others are involved. For example, Philip Kaye, who played a major part in the Golden Egg operation, controls Prezzo with just over 50 per cent of the shares. He topped up his stake when the group raised £6m this year by selling shares at 30p a time. Clearly, Prezzo has successfully negotiated the difficult start-up period but is much in its infancy.

Yet, even at this early stage, the signs are encouraging. It seems to have established several recipes for meeting the growing eating-out requirements of the nation and, I feel, could be on its way to emulating other Kaye ventures, such as Ask, which now has 150 outlets trading under the Ask and Zizzi banners.

Whether Ask will retain its independence is not clear. Takeover talks are at a preliminary stage. The Kayes have supported two takeover bids, Golden Egg and City Hotels. They no longer dominate Ask and, I suspect, will be content to sell if they feel the offer is good enough.

So I have decided to take the plunge and add Prezzo to the no pain, no gain portfolio, lifting our number to 14. The shares have been recruited at 69p, with a notional investment of £5,000.

There is no dividend return at present but to expect one from such a young company would be foolish. Hopefully it will not be long before chairman Michael Carlton gets round to putting the group on the dividend list.

Avon Rubber, a portfolio constituent that is a long-term dividend payer, is to announce its yearly results next month. Profits should emerge at £8.5m, with an 8p a share year's dividend. Internet share tipster Tom Winnifrith (on his website t1ps.com) expects this year's profits to hit £10.3m with an 8.5p payment.

Since I recruited Avon at 194.5p in 2002, the shares have displayed little bounce. But they had enjoyed a good run before I alighted on them. In trading terms the company has not disappointed and, if results meet tipster Tom's expectations I will be happy to hold on.