Company Spotlight: Plasmon can get past the dreaded 'so what?' factor

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The Independent Online

Convention has it that the British are good at inventing things, but bad at making them pay. Think Hovercraft, CAT scanners, Concorde. That probably explains why Plasmon is still valued in the stock market at £120m when it has invented a new world standard in optical disc technology for the data storage market, and has the likes of Mitsubishi and Hewlett Packard to sign up to it. So what, says the market. They'll probably never make any money out of it.

Certainly, Plasmon still has to prove that point. It has spent four years and £25m developing its new ultra-density optical (UDO) system, which is based on blue laser technology, and it has been dogged by component supply problems ever since it started manufacturing late last year. But at the annual shareholders' meeting 10 days ago the company said production problems had been solved and output was set to hit target by September.

Until recently, Plasmon's business has been supplying data storage libraries using Sony magneto-optic drives. These have been the industry standard for the past decade or more. The libraries, housing an array of disc-drives, are like juke boxes. But instead of playing golden oldies they allow the user to access old computer files or medical records. As regulation has required more and more information to be stored, the business has mushroomed.

The traditional (and still the cheapest) way of storing data is on tape. But it is cumbersome to use and discs have progressively infiltrated the market. The latest Sony discs each store 9.1 gigabytes of information at a cost of $90 (£49) - or nearly $10 a gigabyte. By contrast, Plasmon's UDO disc can store 30 gigabytes of information at a cost of $60 - or $2 per gigabyte. That is only a dollar or so more than the comparable tape cost. The company is already working on a second version that will doubtless offer even greater savings.

If Plasmon's UDO system simply took over the magneto-optic market it would probably generate sales of about £150m a year. It should be doing that within two or three years. But because it offers so much increased capacity at so little cost it is likely to reach parts of the market Sony could not. One of the big areas is e-mail archiving. The omens are good. Hewlett Packard, which supplies about 40 per cent of the world's servers in this area, has adopted UDO technology and started manufacturing in May. Plasmon is in talks with other original equipment manufacturers and expects to sign them up as the year progresses.

In the medical imaging market, Plasmon has announced an agreement with what is coyly described as a "major medical manufacturer". This is thought to be an offshoot of GE of America, one of the world's biggest companies. There are a host of other applications. UDO discs could one day replace film in speed cameras, permitting many more images to be stored and cutting down on servicing time.

In a canny move, Plasmon last year licensed Japan's Mitsubishi to make UDO discs. It reasoned that, unless there was a second maker of discs in the market, UDO would not become a world standard and some customers would resist making the switch to the new system.

None of this removes the "so what?" factor. Plasmon has yet to make any money out of UDO and the development costs have been enough to keep it in the red over a number of years. The launch of UDO actually worsened the situation as customers held off buying old technology ahead of UDO's arrival. There is unlikely to be a profit in the first half of the current year either.

But all that should change in the second half of the year as production levels mount and the effects of the HP and other deals start working through. Meanwhile, research and development spending, which has been over £7m a year, will drop back by £2m or more. As a result, Richard Dyett at the house broker Investec reckons the company will finish the year with a profit of about £6.7m for earnings of between 9p and 10p a share.

In the following year those figures should double as Plasmon ramps up production and sales of UDO effectively replace those of magneto-optic. But what Dyett cannot gauge at this stage is how much incremental business UDO will generate in new markets. The HP and GE deals point the way. If, as expected, more of these big names sign up to UDO, Plasmon could be earning 40p or 50p a share a few years out. That's not bad for a company whose shares currently trade at 207.5p.

But beware: the "so what?" factor is not about to evaporate. Investors will need patience with this one - but it will pay off eventually.

Pshearlock@yahoo.co.uk

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