How digital film could launch this stock to superstardom

Not many chartered accountants make a point of telling you what they do. But Gary Smith is different. I have met him twice and both times he has told me quite emphatically that he is a chartered accountant.

Perhaps you think I accused him of being an actuary and he wanted to explain that he was not so dull as that? But no! Smith had another reason, a good reason, to advertise his grasp of numbers. You see, he works in the film business, where matters like numbers, spreadsheets and, heaven forbid, profit projections are, well, just the teeniest bit vulgar.

Smith is not in the film business so that he can mingle with the stars and make fawning comments during post-premiere cocktail parties. He is in it for the money. This, he told me, makes him rather popular in Hollywood among a small group of outcasts. These are the men for whom making a film is not about transporting the audience to dreamland but about making something that will sell for more than it cost to make.

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Smith the chartered accountant told me how finance works in the world of film. Money is needed up front and this comes from four sources. There is money put in by the distributors through pre-sales agreements; there is the money put in by the producers; there is money contributed by outside investors; and then there are tax credits'.

The last is a surprisingly large item, at least in the example that I was shown. For this particular film, 30% of the $23m budget came in the form of a tax credit from the Canadian government, which was keen to turn its rolling scenery into one vast film set and lure the film-makers away from Hollywood and our very own Pinewood Studios.

Let me tell you more about the lucrative world in which Smith works and the penny share company he expects to benefit hugely from the changes now happening in this industry.

One man, one goal

Smith is the chief executive of AIM-quoted Intandem Films (IFM) and his role is to arrange the third-party finance for films. For this, Intandem receives arrangement fees and a commission based on sales made to the distributors. The business model is quite neat because the costs of Intandem's small office on the Charing Cross Road are basically fixed, and a fair proportion is covered by the fees received for arranging finance.

But the big swing factor, which covers the remaining costs and hopefully generates a good profit, is the commissions received from distributors. The level of commission depends on whether the distributors think the films are going to be a success. So the obvious question for any investor looking at Intandem Films is: are its films any good? Will they sell?

Smith is very confident that they will be good and will sell. He has built up a roster of films for the coming year, concentrating, as he told me, on action, thrillers and comedies. He has particularly high hopes for a film called Your Perfect Angel, for which the cast is now being assembled.

In case you are tempted to apply, here is the plot summary: "Tallulah and Adler are a month from their wedding day. They are very much in love and absolutely certain that they are perfect for each other until Tallulah discovers the match-making website YourPerfectAngel.com and suggests that she and Adler take the compatibility test!"

This sounds like something that may appeal to younger film enthusiasts, and this is becoming increasingly important for the film industry.

Why film-on-demand' could be this undervalued company's big payday

While cinemas are increasingly being filled by the over-50s, young people want to see films when and where they want to. This means via new media channels, maybe the PC or a portable device.

Thanks to the digitisation of content, films can be cheaply and swiftly distributed across multiple channels. The promised land, where we can call up a film at will, is close at hand and, according to Smith, "people do not understand the scale of video-on-demand".

Traditionally, films have had a run in the cinema before going to DVD and television. But this window of opportunity for the cinemas is being progressively squeezed. Partly to head off piracy, producers would like to bypass the cinemas and make films that are instantly available around the world through whichever channel is most convenient for the viewer to use.

This could revive an industry that has been under a cloud recently, and pay handsome dividends to film financiers, Intandem included. Today, analysts are forecasting that Intandem could make around £1.4m pre-tax this year, rising to £2m in 2012/13.

These are figures that make Intandem's £6m stock market value look low. But if its roster of films is as successful as Smith thinks it will be, these numbers could be beaten by a long margin. I'll be watching their progress with great interest in the months ahead.