Stockwatch: Photo-Me boss has upped his stake – is it time to follow?

Photo booth operator is diversifying into other areas, which presents a big question for would-be investors.

Are there occasions when technical share trading patterns override company fundamentals?  

A case in point is Photo-Me International (LSE:PHTM), a £215 million operator of instant-service machines. It originally operated photo booths, but has diversified into other vending equipment such as laundry and drinks because personal photography undermined its legacy operation. 

Last Wednesday it issued downbeat news on trading for the period since its 7 July annual results to 30 April 2020. Trading across all markets continued to be “severely impacted” by Covid-19, with significantly lower demand. Its machines tend to be in busy locations such as travel hubs and shopping centres, which are often off-limits due to international travel restrictions and social distancing rules.  

The firm added:

“The group saw a slight return of consumer activity as countrywide and regional lockdowns were eased across Europe in the summer. However, since then the increase in infection rates resulted in new lockdown measures, revenue has once again been significantly impacted.” 

Hopes for £37 million net profit dashed

This consensus forecast has been overtaken by Wednesday’s update. This cited the board’s current expectation for £9 million pre-tax profit (before exceptional items) on £175 million revenue in its financial year that has been revised forward six months to 31 October 2020.  

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In July the board said Covid-19 resulted in a £22.7 million revenue impact in the financial year to April 2020. But it appeared operational gearing meant a near-similar £17.7 million profit hit, and there were also exceptional items.  

The £74.2 million debt as of last April means nearly £1 million annual interest. The £65.5 million of cash, also on the last balance sheet, had reduced to £22 million at the end of October, according to Wednesday’s update. 

One of its various banking covenants has been breached, albeit the issue was waived by BNP Paribas, the bank involved. 

Holding the stock is a bet on longer-term earnings recovery 

Downside protection is not great: within £115.8 million net assets, £49.8 million constituted goodwill/intangibles, leaving net tangible assets of just 17.5p.

Historically, the business delivered strong operational cash flow –the table shows this was typically in excess of earnings per share. But there has been chunky capital expenditure needs over the years as Photo-Me has kept restructuring and diversifying from photo booths. Free cash flow is normally good but not great, hence dividends have been a prompt casualty of Covid-19.

A buyer of the shares is therefore speculating on Photo-Me’s diversification becoming a success, after fits and starts over the years - if not decades. 

Laundry outlets were entertained as a new growth area from 2018, and the April 2020 preliminary results showed their revenue continuing to grow to 19% of group revenue. This was insufficient, however, to offset a 19% fall in UK revenue from digital photo kiosks.

In April 2019 came the acquisition of Sempa, a French company in self-service fruit juice equipment. Management sees long-term scope to leverage it internationally but as yet it represents only 3% of group revenue.  

So, it was uncomfortable to read last Wednesday how “most notably photo booths” were being hurt by Covid-19 restrictions, such that this circa 60% majority segment was down 26% from May to October. 

Over the last two financial years, photo booths’ share of group revenue has eased only from 65% therefore a majority of the group could still be regarded as in decline.

“Other” vending units last year accounted for 21% of the group’s estate, such as children’s rides, photocopiers and amusement machines. These were hard-hit by Covid-19 and 15% are targeted to be removed. 

Geographically, revenues comprise 60% continental Europe, 20% UK/Ireland and 20% Asia – which at least is a currency hedge, should sterling depreciate due to a hard Brexit. 

Another difficulty for making projections is Photo-Me segmental reviews disclosing revenue and capital expenditure, but one is left unsure exactly what margins may be involved from the varied operations. The table does, however, show group operating margins of around 20%. This was very good historically, but time will tell what the future heralds.  

Founder-CEO appears confident in a U-shaped recovery 

Despite the 2021 consensus forecast being an optimistic hope for a V-shaped recovery, Photo-Me’s CEO appears confident it will happen in U-shaped form.

Over the last 12 months Serge Crasnianski – a 78-year-old Frenchman who won Entrepreneur of the Year at the 2016 PLC Awards – has raised his stake from 22.7% to 27.8%. This has chiefly been in a 45p to 55p range the stock has traded in since Covid-19 hit markets. 

One view of this could be that he is accumulating equity with a potential offer for the group in mind. Cynics would say that explains why Wednesday’s update was downbeat. 

However, it is completely right that the board should level with investors. There is very limited visibility, further restructuring measures are possible and budget is for revenue of £175 million in the 12 months to October 2020 with pre-tax profit around £9 million.  

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Judging Crasnianski is made somewhat tricky by his end-2007 ousting as CEO by two institutional shareholders who criticised his handling of a proposed divestment. That said, by July 2009 he was re-instated, having raised his stake to 22.2%. 

The group was struggling with the decline in photo booths, its annual pre-tax loss was reducing from £21 million to £5 million and the dividend was scrapped. He has had a good decade to hone the business, but we are cautious about ongoing restructuring. I feel this would not be altogether related to Covid-19, but more from changing attitudes to photo booths. 

Yet he has strong credentials as a long-term player and prolific inventor. In 1963 he invented the world’s first automatic key-cutting machine, which now exists in thousands of hardware outlets globally. 

This company was acquired by Photo-Me in 1994, becoming its manufacturing business, hence Crasnianski’s first term as CEO from 1998 to end-2007.

Remember that Anglo-French businessman Jacques Murray very competently chairs Andrews Sykes (LSE:ASY), also in business services, as a centenarian. I would not discriminate against exceptional talent on grounds of age. 

How many years yet, of ongoing restructuring? 

This is perhaps the main question a fundamentals-driven investor would want to address, in this decades-long quest to diversify from photo booths.

A chartist would interpret Photo-Me as roller-coaster trading material rather than a long-term hold. After the 2000 tech-stock bust it was in a 16p to 120p range, then broke out from Spring 2014 to reach 186p in early 2018. 

But it slumped again that year after hopes for Japanese photobooths linked to a new ID card programme were dashed by the government not making it compulsory for citizens. Re-organisation costs in Japan hurt annual profit in the 2019 year.  

In the long-term context, Photo-Me has yet to prove a successful adaptation from photo booths. Moreover, its replacements for that are quite diverse and need more time to prove what they can earn.  

All unprofitable machines are yet to be removed: at least 22% of UK units will go, 41% in China, 80% in South Korea and 5% of those in continental Europe. Overall, nearly 10% of the estate will be culled by next April. 

Buy if you trust the CEO’s accumulating as a prop

On fundamentals the conclusion is a cautious ‘wait and see’, but that may leave Crasnianski chuckling – and accumulating equity at what he sees as attractive prices. 

Speculators could therefore view his support similarly to how investors might insist on balance sheet assets: limiting downside. 

Also, while 2021 may be trickier for defeating Covid-19 than markets hope for, 2022 should be better. 

Photo booths may still have value as human activity picks up again – the last financial year showed a modest £8.7 million capital expenditure against £128.4 million revenue –so long as those unprofitable ones are swiftly culled. 

On a two-year view therefore, and respecting the gamble involved: ‘buy’. 

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.