PHOTO-ME INTERNATIONAL is one of capitalism’s neater inventions. The company’s purpose is narrow — it is the world’s largest photo-booth operator, as well as being a leading supplier of photo processing labs. After a difficult period, in which the company got caught up in the dot-com boom, 2004 figures show that Photo-Me is back on track.

Photo-Me snapped profits of £21.1 million, compared with a loss of £3.4 million last time, while sales were up 17 per cent to just short of £220 million. Debts of £33.4 million were eliminated too — and yet the shares fell 5 per cent yesterday to reach 99½p, which goes to show that there is no pleasing the City.

Nevertheless, investors should not be put off by the short-term uncertainty. Photo-Me’s recovery is based on rapid demand for the company’s latest minilab — a photo-processor that sits on site with any retailer. In the year to April the company sold 1,300 units, twice as many as in the year before, helped by a contract with Tesco in the UK.

That doubling helped to offset weakness in the company’s photo-booth operation, where sales eased. Photo booths are the group’s cash cow, generating about £17 million in operating profit, but demand for passports and other forms of identification appears to have peaked — despite the mounting obsession with security — which means that the minilab business is the key to the company’s short-term valuation.

The long-term picture, however, is a little different. Photo-Me hopes to cash in on the emerging popularity of digital cameras and camera phones, by developing standalone processing kiosks, which allow people to develop pictures themselves. Initial trials have gone well, generating gross average monthly revenues of £1,650, on a booth that costs £2,000 to make. The plan is eventually to roll out 300 to 400 units a month, but Cazenove, the broker, was worried yesterday whether those kind of growth rates could be met, which is what depressed the shares.

Set those worries aside, for a moment, and the shares look good value. The shares are trading at 17 times forward earnings, supported by a modest 1 per cent yield. Photo-Me has good growth prospects, even if the exact pace of improvement is not clear. Buy.

John Laing

JOHN LAING reckons it can make its money from the British Government’s love of off-balance sheet finance. The company has got out of housebuilding and construction, in favour of becoming a specialist in the private finance initiative.

PFI, which transfers the costs of construction to the private sector, has become pretty much the only way that the public sector is able to invest in badly needed infrastructure — the likes of schools and hospitals to you. But, while riches may await, the private sector has to bear considerable risk, which is why John Laing has chosen to form a £300 million joint venture with Commonwealth Bank of Australia.

The agreement allows John Laing to spread the financial risks associated with PFI deals. If a bid goes sour, the company has to carry the problems on its own balance sheet. It also increases the company’s firepower to bid on more and bigger projects — and it may provide fresh contacts for new deals. The two plan to bid on British hospital and European road projects worth up to £6 billion over the next three to five years.

The tie-up came as the company gave a positive assessment of trading ahead of its half-year results. It has secured a further five deals in the first half, bringing the group’s project portfolio to 37. In addition, the group is currently preferred or sole bidder on a further 15 projects, of which six are set to close in the second half.

In the UK, fresh plans have recently been announced to build more new schools and hospitals using PFI, and more is likely to follow as the public finances remain tight. But there is also work abroad. In Germany, Finland and Ireland, Laing is winning work to build new roads.

Unfortunately the shares, at 39 times forward earnings, don’t come cheap. They have ticked up 15 per cent since March, trimming the prospective yield to just 1.4 per cent. There is a good growth opportunity but it is already priced in. Hold.

Northgate Information

THERE are some industries that just seem incapable of shrinking. Take congestion charging, in which dozens of cities are preparing to follow Ken Livingstone’s lead in taxing the motorist.

Northgate Information Solutions is the software company that administers the penalty notices for London’s traffic- congestion scheme. Northgate is in partnership with Capita, the support services group, and following on from their work in London, they are bidding on more than 30 regional congestion contracts today.

Better still, congestion-busting is only one part of Northgate’s business. It has lucrative lines in human resources and payroll software used by FTSE 100 companies, and products tailored for local government and the police. All but ten of the 52 constabularies in the UK use its products for tasks such as collating crime statistics.

Northgate’s year to April 30 showed that, like the much larger SAP and Oracle, it is enjoying improved trading as customers regain their appetite for spending on new technology. Analysts expect strong revenue and profit growth in the coming 12 months.

Despite more than doubling in the past year, Northgate shares trade at about 15 times forward earnings, a discount to the technology services sector. Meanwhile, Northgate’s debt is manageable enough for it to continue buying rivals within its existing sectors, a strategy that has netted consistent growth. Buy.

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