The Investment Column: Provident does not yet merit interest

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The Independent Online

Our view: Avoid

Share price: 667.5p (+4.5p)

Provident Financial is never going to be a business for the ethical investor. Even those not completely put off by its business model - providing high-interest loans to the poor - will have run a mile after the Competition Commission's recent findings. It accused the industry (of which Provident is by far the biggest player) of making £75m in excess profits at those hard-up customers' expense. That the shares did not tumble in response is largely a reflection of the fact that the commission stopped short of imposing price caps, relying instead on a series of less aggressive "remedies" such as requiring home-credit companies to pay for a price-comparison website. Yesterday, Provident sought to reassure the market profits will be in line with expectations after yet another challenging year.

While that might reassure some after the ever- growing list of problems faced by the group in recent years, this is still a business where bad debts are growing faster than revenues at its door-to-door lending business. The credit-card business Vanquis is close to hitting its break-even point of 250,000 customers, but it has taken four years to get there. Bad debts are rising in this business too.

Things look a little brighter at the international businesses - which are being spun off next year. The company has sorted out problems in Poland (where caps were imposed), enabling it to start marketing for new business again, while a brief suspension of the Hungarian operation has now come to an end.

At just over 12.5 times expected earnings, the shares are cheaper than rival Cattles, although the yield, at just over 5.5 per cent, is better.

However, even if you are comfortable investing in this sort of business, there are probably better homes for your money than here, at least until it can prove it can trade successfully without getting egg on its face. Avoid.

Photo-Me International

Our view: Buy

Share price: 92.5p (-0.5p)

Investors in Photo-Me International need a steady nerve and plenty of patience. Over the past few years, the company has given shareholders as many highs as lows - interspersing a series of profit warnings with news of promising new contract wins or takeover talks.

Its interim results yesterday were, on the face of it, another down day, with pre-tax profits 43 per cent less than the same period last year. But after last month's profits warning, investors were prepared for the worst. Furthermore, the prospects for Photo-Me over the coming months are now beginning to look much stronger.

Photo-Me essentially has two main divisions - vending and manufacturing - which have struggled due to structural changes within the photographic industry over the past few years. Its vending business - which mainly comprises passport photo machines, small children's rides and digital-photo printing machines - is a great cash-generative business. However, new European passport photo regulations, along with a shift to biometric passports in one of its key markets, have left some of its booths outdated and in need of updating over the past year.

On the manufacturing side - where it makes photo-processing machines for companies - prices have been driven down by a number of struggling businesses in a last-ditch attempt to keep themselves liquid. Several of these competitors went bust, and the year ahead promises a much more stable pricing environment in this market.

Having walked away from bid talks last month, the company said yesterday it is still considering selling off part of its business. Chairman Vernon Sankey suggested its vending division could be first, but stressed the board will only let it go for the right price. There remains plenty of value in the Photo-Me business, and, after the knocks to its share price over the past year, now looks like a good time to buy.

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