Investment: Photo-Me snaps into action

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The Independent Online
SHARES IN Photo-Me, the world's leading maker of coin-operated photo-booths, jumped 5 per cent yesterday when the company unveiled a 36 per cent increase in pre-tax profits in the six months to October.

In one of the market's most surprising recovery stories, Photo-Me has nearly quadrupled its value in the last 18 months. Shares ended up 18p at 395p yesterday, valuing the company at pounds 270m.

Earnings at the group rose by 52 per cent to 14.56p a share after the group succeeded last April in taking out its biggest competitor, the Swiss- owned Prontophot, for pounds 10.5m.

The acquisition leaves Photo-Me with a near-monopoly of coin-op photos in the UK, with more than 90 per cent of all booths. Its dominant position is not considered to be a monopoly because of competition from photographic shops.

It is now pushing through an aggressive cost-cutting exercise to extract pounds 5m a year in savings from the acquisition, or 4 per cent of turnover. The exercise includes 80 redundancies at a photo-booth manufacturing plant in Bookham, Surrey. The group is also on a drive for productivity, computerising its manufacturing processes.

In the early 1990s, Photo-Me was perceived as a highly cash-generative business with huge growth potential. The group invested heavily to buy KIS, a French manufacturer of photographic technology. The strategy was to become a leading manufacturer of photographic equipment. But the City struggled to accept the heavy research and development costs.

As the decade wore on, the shares tumbled to a quarter of their value. The Government's decision to abolish the Visitors' Passport was a blow. Photo-Me also encountered stiff price competition from Swiss manufacturers. By November 1997, the share price was close to pounds 1.

Then the research and development finally began to bear fruit.

Early last year, Photo-Me signed a deal to create Kodak-branded machines which produce photo-stickers - typically featuring pictures of the customer with their favourite celebrity. The stickers have proved hugely popular in Japan as ornaments for letters.

Serge Crasnianski, the vindicated architect of the KIS purchase, was made chief executive in October. His strategy is to step up the group's new technologies while reducing its indebtedness, already down from 72 to 58 per cent.

Photo-Me's next move will be to expand its photographic equipment with the launch of the first minilab using digital technology, and the roll- out of machines producing instant postcards superimposed with an image of the customer.

But the group's biggest boost will come from another Government decision - to make photos compulsory on driving licences.

Nick Batram of Greig Middleton, the house broker, predicts a full-year earnings in the year to April 2000 at pounds 27m, up from pounds 19m this year. On yesterday's price that leaves the group on a forward p/e of 15.7, a strong hold.