WHAT YOU WILL LEARN
-Photo-Me has enjoyed their longest earnings expansion, nine years.
-Laundry Division is their growth driver.
-Valuation level at record highs.
Photo-Me: At a Glance
Photo-Me has a lot of vending units, 47,946 to be exact.
And these units cover three areas of their business:
- IDENTIFICATION: photo booths and integrated biometric identification solutions.
- LAUNDRY: unattended laundry services.
- KIOSKS: high-quality digital printing.
Photo-Me growth plan is simple.
Utilise internal cash flow generation and re-invest for complementary products to drive future growth, combined with the penetration of new geographic markets.
That strategy has paid dividends as shareholders saw market valuation grew from £170m in 1998 to £700m. In share price terms, it rose from 53 pence to £1.87, a return of 7%. Add in the dividends, and you got back your original investment (in absolute terms).
Make the share price inflation-adjusted then the real return falls to 4% per annum.
Not every business say what they would do because of competition and demand constraints.
Next three-year growth plan
Their three-year plan is based on installing more photo I.D. and re-programming existing machines to meet government policies.
They will continue to install kiosks in printing photos from smartphones.
But Laundry will be their biggest winner in terms of investment because Photo-Me wants 6,000 units ready on standby.
Breakdown of revenue per unit
It has given us monthly breakdown of sales for laundry and printing kiosk per unit. So, for each Laundry Unit, it makes 1,508 Euros per month up from 1,400 Euros.
The laundry division made £17.3m in sales, an increase of 75%, due to the number of units rising to 2,332 from 1,579.
Monthly sales from their kiosk machine rose is £1,500 in the UK and £800 elsewhere.
I think Photo-Me is a competitive business.
Looking at their interims, sales are up 10%, but 7.5% at constant currency. Operating profit rose to £33m from £30m.
Their provisions fell to £601k from £2m, giving an additional income of £1.4m to sales.
On an annual basis, their operating margin has greatly improved for the past nine years and those who bought the stock has seen a ten-bagger gain.
Even when you bought Photo-Me at their previous peak in 2004, you would have recouped your losses.
This was done when turnover per year for the last 19 years averaged £203m vs. 2017’s sales of £214.7m.
Now, Photo-Me is seeing record margins.
Market valuation looks correlated to operating margin.
Photo-Me has increased their borrowings to £18m from £10m. Net cash position of £47m is below £68m from last year.
The company has intangibles of £27m, representing 14% of total assets.
Interim’s operating cash flow decreased to £40m from £45.1m and would make last year operating cash flow of £61m hard to surpass.
Interim net investing fell to £15m from £23.5m. With no mention of capex spending in the second-half, I think it would be lower than year £43m, if they want to continue their progressive dividend policy.
Since 1998, the average capex spending is £27.8m.
At £700m, Photo-Me valuation is setting new records.
So, is this a time to sell Photo-Me?
Can the past tell us about the present?
When the world economy saw slowing economic growth in 2002 and experience the great recession of 2008, Photo-Me profits turned to losses.
Currently, Photo-Me has experienced a longer period of growth with record operating profits.
Earnings are at their highest cycle, but the company has promised more growth and profitability.
From a valuation perspective.
The market value of operating cash flow is at their highest since 1999 at 13 times to cash flow earnings.
On the flip-side, Price to OCF can crash to one time multiple. Cash earnings did fell, and I wouldn’t be surprised if full-year numbers saw a decline, causing the multiple to rise.
Final Thoughts: Photo-Me
Today’s results showed that Photo-Me is pushing ahead to grow their business, but it looks like sales growth has slowed to 7.5% (constant currency).
Still, I think they could manage moderate sales growth, as long as operating margin stay around 22-24%.
Management is trying to adhere to this equation below:
High operating margin + Higher Sales = More Profits = Increased Market Valuation.
Photo-Me has seen the longest expansionary in their earnings cycle, a period covering nine years.
Longer than any previous period.
That makes Photo-Me a medium-risk stock because if a recession occurs, earnings will collapse.
I’m not saying Photo-Me isn’t competitive, but it operates in a niche that is highly-cylindrical and sensitive to the economic climate.
Another major factor is Brexit because over 50% of sales are derived from and any poor outcome would adverse Photo-Me business.
I think the following risks are valid for Photo-Me share price appreciation:
1). Experiencing their longest earnings growth period (nine years);
2). Brexit disruption;
3). Setting dividends too high to maintain for the long-run;
4). Valuation is high and with Operating cash flow at their peak;
5). Risk of slow growth.
With these concerns, and despite their growing laundry division and other contract wins, I feel earnings expansion have run a long way.
Photo-Me share price Forecast for the next year would be unchanged at around £1.70 -£1.90 per share. If a recession occurs the share price would be much lower.
CALL TO ACTION
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The above analysis is based on my opinion and nobody else. It does not constitute professional investment advice. Data is correct on at the time of availability. I don’t hold the company’s shares unless stated.