Time to hold on to your egg

Egg; Photo-Me; Orbis

Egg has emerged as the best performing banking stock of the year, and yesterday's interim results justified the faith of investors who bought in at its low point in November, when the internet bank was being written off with the rest of the dot.coms.

Egg has emerged as the best performing banking stock of the year, and yesterday's interim results justified the faith of investors who bought in at its low point in November, when the internet bank was being written off with the rest of the dot.coms.

Egg's success to date has been founded on a clever exploitation of customer greed and inertia to build up a position in one of the most profitable segments within financial services: credit cards.

The firm started life four years ago as an aggressive entrant into the savings market, luring customers with a promise of high interest rates and instant access. In the first half of this year, however, deposit customers barely moved while credit card users more than doubled to 1.23 million. Never mind the warnings of economic slowdown; in the UK at least, the credit-funded consumer boom continues apace.

The company is swift to reassure that its customers present low credit risks. Paul Gratton, the chief executive, says you don't tend to find egg clients among the many thousands nowadays losing their jobs on the factory floor. Indeed, the average balance on an egg credit card is a whopping £1,750 – twice the UK average. Small wonder egg no longer chases new savings business and its rates here now lag many rivals. Deposits fell by £725m in the period, as customers with larger balances went elsewhere.

It is hard to see the group failing to meet its target of breaking even by the fourth quarter of the year. Indeed, consensus forecasts of £3m in pre-tax profits for 2002 look too modest. Some worry that, if it is this easy, sooner or later someone else will have a go. The answer is they already have, but egg has proved adept at capitalising on its brand and first-mover advantage. With further alliances in the pipeline following this week's tie-up with Microsoft, it would be wrong to bet against the company. The shares, up 3p at 165p, are worth holding.

Photo-Me

Worrying news from Photo-Me International. The group runs the photo booths found dotted around the UK and France, and user numbers are suddenly way down. Full-year figures yesterday, which saw underlying profit up 19 per cent to £23.7m, revealed booth revenues fell 1.5 per cent, despite more kiosks and the new photo driving licences. Management blamed everything from the fuel crisis to foot-and-mouth.

It's difficult to believe that was the problem, and impossible to believe the answer is a new generation of digital photo-booths allowing customers to superimpose their mugshots on to the Manchester United football team, or similar. Anyway, the roll-out of these does not begin until September.

The company would rather investors focused on the potential for its digital film processing labs, which it is selling in bulk to Kodak in the Far East. Sales of these were ahead of analysts' forecasts, but the outlook for next year is not yet clear. Economic gloom could threaten investment by Kodak and others, and Photo-Me may have to wait for new orders.

Photo-Me's management has yet to fully bridge the credibility gap that opened up last year, after accounting problems with a related-party acquisition, which was paid for in old photo booths. They have made some progress in increasing the transparency of its results, but it is still miles behind best practice. Forecasts for the coming year vary wildly and the stock, up 4p to 70p yesterday, might be on a forward p/e of 12 times, or 17. No matter, this is one best avoided.

Orbis

Orbis, which makes its money by boarding up empty council houses, has had a strong run in the past year, but news of a margin squeeze in the first quarter has hurt sentiment.

Ian Quinlan, the chief executive, told investors at yesterday's annual meeting that trading at the security operation has remained competitive and he expects growth in the year to March 2002 to contract, particularly in the first half.

Analysts trimmed their annual profit forecasts from about £10.5m to £9m, compared with the £8.4m Orbis made in the previous year.

The company has continued to win new business. But it has experienced "temporary" delays in bringing some contracts on stream just as Orbis increased costs to handle anticipated expansion. The smaller Orbis Monitoring Services division has also experienced a slower start to the year.

The shares fell 28 per cent – or 16.25p – to 42p, to value the business at £73m. The price is still well above the 27.75p of 12 months ago, but much of the growth has come from hopes of a takeover offer. Mr Quinlan had little to say on the subject yesterday. He is still negotiating.

Analysts predict Orbis will make earnings per share of roughly 3.8p in the current year, putting the shares on a forward multiple of 11. That's high enough in the current climate and in the absence of a firm bid.