No Pain, No Gain: Why restaurants are such an appetising prospect

Eating out is becoming a national obsession, with spending in restaurants continuing to grow at a remarkable rate, according to the Office for National Statistics. So it is perhaps not altogether surprising that the restaurant star of the No Pain, No Gain portfolio has served up another scintillating set of figures.

Prezzo was recruited nearly three years ago at the equivalent of 17.25p. The shares have since brushed 70p and are now at about 55.5p. They probably deserve to be nearer their peak, although competition is increasing with (for example) pubs beefing up their restaurant facilities in a bid to counter the proposed smoking ban's expected debilitating influence on drink sales.

So far, Prezzo and the portfolio's other restaurant chain, La Tasca, have appeared immune to the increasing pub challenge, the expansion of rival groups and the seemingly endless flow of privately owned start-ups. They are used to operating in a tough environment and should be able to hold their own, and more.

It is estimated that 35 per cent of food spending is now outside the home, compared with 20 per cent a decade ago and, I would guess, considerably less than 10 per cent in my younger days. The eating-out habit - with improving margins - should continue. Indeed, in the United States - so often the trendsetter for this country - restaurants have a 50 per cent-plus share of food spending.

Of course, the two portfolio constituents are not the only interesting restaurateurs. Witness the remarkable goings-on at Gondola, owner of the Pizza Express, ASK and Zizzi chains. After being the subject of successful private equity attention, it returned to the market in November with, presumably, all the surplus fat removed by its two owners, TRD Capital and Capricorn Ventures.

Even so, another private equity group may mount a bid. Cinven reckons eating-out prospects are so appetising that it is considering taking Gondola private again at about 415p a share. Such hunger must make other quoted chains, like Prezzo and La Tasca, feel vulnerable.

Restaurant Group, a major player taking in such names as Frankie & Benny's and Garfunkel's, should be wondering whether it will end up predator or victim. Last week it reported half-year profits up 16.5 per cent at £13.5m. Prezzo's half-year profits were up 40 per cent at £3.1m from sales 51 per cent higher at £24.1m. It has 90 outlets and could top the 100 mark this year. The company, with cash of £9.4m, implies that its second six months has started well, and I would expect last year's profit of £6.4m to be comfortably exceeded. A figure around the £8m mark seems likely.

Unlike RG and La Tasca, Prezzo makes no mention of World Cup action putting sales under pressure. Presumably the football feast made little impression. RG and La Tasca have got over their football-inspired lull and sales have recovered.

The Kaye family runs Prezzo and would obviously have the say-so if a bidder materialised. The family has in the past shown a healthy inclination to cash in when predators displayed interest. The Kayes' first quoted chain, Golden Egg, which prospered in the post-war years, fell, if I recall correctly, to the old EMI showbiz group. Since then there have been at least four quoted ventures. Three of their concepts - Garfunkel's, ASK and Zizzi - are major brands now embraced by other groups after takeover deals.

Phillip Kaye, who controls Prezzo and is described as a consultant to the company, takes a back-seat role these days, leaving the day-to-day management in the hands of younger family members. For example, his nephew Jonathan Kaye is Prezzo's chief executive.

As far as I am aware, the Kayes have equity links with one other quoted company, Gourmet Holdings, running a small chain of gastropubs. Phillip Kaye has a significant, but relatively modest, shareholding in the group, which has yet to deliver returns to shareholders.

I have on occasion pondered the possibility of recruiting Gourmet to the portfolio, as it holds out the promise of emerging as a rewarding business. But there has so far been little evidence that it is making the sort of progress I would require.

Still, it should be near to making a greater impact. I will, in the meantime, continue to enjoy the taste of Prezzo and wait for La Tasca, still below my buying price, to reflect the stock market's growing appetite for restaurant shares.

cash@independent.co.uk