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Film production company Intandem Films is set to announce its results for the year to June 30th within the next three weeks and while we expect it to report a small underlying loss for the year just ended, its pipeline is stronger than ever and – given the long lead times in this industry – we are hopeful that the company will be able to give a strong steer that this year it will report a material profit – something not discounted in a 3p share price.

The newsflow in recent weeks has been interesting. On 24th November Intandem announced that its action thriller, ‘The Veteran’ had concluded shooting in London during August and is expected to be released in UK cinemas in Spring 2011. The rights to the film have already been sold to Pinnacle Films for Australia, California Films for Brazil, Audio Visual Enterprises for Greece and Falcon Films for the Middle East, all based on the script and a trailer. We expect that there will be further announcements on big film releases during the coming weeks.

Intandem is a London based international film company and is currently putting together an exciting slate of over 8-10 films with total budgets in excess of USD100 million with production commencing in 2011. It specialises in raising finance for commercial feature films and selling them to distributors around the world.

The company flagged in August that June 2010 revenues and losses would be down on 2009 but trading for the current financial year is clearly strong with sales being concluded with UK distributors for both The Kid and Beneath Hill 60. Intandem has added to its library of completed films after being appointed as the sales company for TELSTAR. This film is directed by Nick Moran and starring Kevin Spacey and James Corden and the distribution rights for North American are being negotiated.

Intandem’s strategy is to secure worldwide sales rights for films in the USD10 – USD25 million budget range. Financing deals can take a long time to conclude but the recent announcement suggests that progress is being made and a significant revenue increase in sales commission can be anticipated in 2011. Intandem closely manages the risk associated with the film industry and does not invest in films with its own resources. Its highest profile film to date was ‘How To Lose Friends and Alienate People’ starring Simon Pegg, Jeff Bridges and Megan Fox – for which Intandem raised the finance and sold the film to distributors such as Paramount, Warner Brothers and MGM.

As a fixed cost business earnings are highly sensitive to increasing sales. Intandem’s film library is growing and there is visible film pipeline. Intandem’s relatively low cost operations cover the key value added points of a film’s development and sales cycle. As the producer Intandem earns 2-5% fees and thus benefits from increased pipeline visibility. This is followed by arranging the finance, developing international sales and seeking distributors on which commissions of around 15% are received. The balance sheet is not an issue and as the pipeline of new films continues to improve we see the potential for a major re-rating.

Our forecasts, which will be reviewed after the results and we see risks very much on the upside, assume that Intandem achieves a deal flow of 8- 10 modest budget (average of USD10 million) films in 2011. There is always the chance, with the CEO Gary Smith’s contacts in the film world for much larger projects which given the operational leverage could transform the P&L. Given the increased earnings visibility and the developing film pipe line and of the high operational leverage we view a rating of 12 times current year earnings as undemanding with, perhaps transformational interims reported as early as April meriting a further re-rating, and as such we recommend the shares as a buy at 3p with a 7p target price.

Forecast table

# 2010 Pre-exceptionals and excluding the USD6.5m (GBP4.2m) non-cash profit.
## 2011 On a nil tax charge