Photo Me International provides various different automated vending machines, most of which are photographic related. The machines include Photobooths, Digital Printing Kiosks and coin operated amusement rides. They are most active in the UK, France and Japan but are also present in Ireland, Austria, Belgium, Germany, Hungary, Luxembourg, Netherlands, Poland, Portugal, Switzerland, China, Singapore and South Korea.
We can see that revenues are down across both business components, with Sales & Servicing suffering the biggest fall whilst the fall in Operations revenue can be explained by adverse changes in exchange rates. It is also apparent that many costs have fallen too, however, with staff costs falling £5.2M; property leases down £1.1M and R&D down by £1.1M. Non cash depreciation has also fallen and the group made a £2.7M one-off gain on the sale of property, plant and equipment. All of this means that the gross profit was up by £3.7M to £42.2M. Admin expenses were also down somewhat so operating Profit was £4.2M better than last year. The group has sold the rights to the future rental stream on the investment property up to 2019. They will still collect the cash for the rental money but that rental income will not stay within the company.
Lower interest from financial assets and the lack of any investment sales was counteracted by a lower bank loan cost before a £1.2M increase in tax caused the profit for the year to be £3M up, at £17.6M. Unfavourable exchange differences gave a 15.1M total income compared to £12.3M last year. Overall a good performance, although slightly flattered by the gain on the sale of the tangible assets.
Overall we see total assets falling by £3.9M. The biggest fallers were in inventories, trade receivables and the intangible R&D Costs. These were mitigated somewhat by a £1M increase in other intangibles and a pleasing £5M increase in cash. Liabilities were also down, driven predominantly by decreases to outstanding loans, accruals and trade payables. Not all liabilities were down, however, and we saw fairly significant increases in provisions, including a £800K increase in employee claim provisions (most of those costs are expected to be incurred during the next financial year) and a £2.4M increase in other provisions which represent potential legal claims against certain group companies – there is no clue as to what these claims relate to. Overall, net tangible assets were £3.7M higher at a very impressive £81.6M.
The cash taken forward from the operating profit was actually fairly similar to last time but preferential changes in working capital meant that the cash generated from operations was £46.6M, £4.2M up on last year. After tax, this was still an impressive £38.9M. Out of this cash flow, £17.3M was spent on capital expenditure and £4.5M was paid back in loans. The group has nearly cleared all of its debt now, so the amount spent on this was £6.7M less than last year. There were a couple of things that flattered the cash flow somewhat, such as the sale of some tangible assets (£3.7M) and the sale of treasury shares (£5.7M) but this was more than spent on a massive £12.7M hike in dividends to £20M. After that, the group still managed to end the year on a positive cash flow of £5.4M to add to the £54.6M it already had!
Although revenues fell, the operating profit for the Operations segment grew on last year. Likewise, in Sales and Servicing, losses reduced when compared to last year despite the falls in revenue. During the year there was an overall reduction of vending units, mainly due to the reduction in numbers of Amusement Rides in the UK. In Europe, there was a particularly strong performance in Germany, where the group has been increasing the number of Photobooths considerably, and Belgium. Due to lower costs, there were also decent increases in profit from the UK, Switzerland and Japan.
Photo-Me are taking this opportunity, using their cash generated by the photo booths, to diversify their offering. Revolution is a high capacity coin operated washing machine and is able to wash large loads in 30 minutes, it also includes a tumble dryer, but there is no information about how long the drying takes. Photolight is an eco-friendly solar street lights that do not require connection to the grid. These products are an effort to hedge against any changes in photo id requirements and to generate more cash.
Although most of the revenue and profit comes from the Photo booth estate, the group are now rolling out the Revolution laundry machines into France and Belgium initially. The units are to use the same locations and same engineers as the Photobooths so there is a good synergy on costs. As with the photobooths, a commission will be paid to the site owners. There are now 275 units in the field, 62 owned and operated by Photo-Me, and the plan is to increase this to over 2000 units by the end of 2015. So far the machines have been very cash generative, with an average EBITDA margin of over 50%. The Digital Printing Kiosks operate in a mature market, mainly in France and Switzerland but the group continue to innovate with new products for this market, the UK amusement machines are a very small part of group revenues but now that some loss making units have been removed, the sector is profit making.
In recent years, the group have rolled out their more advanced Starck photobooths and have entered a number of new exciting markets such as China, Korea and Poland. This increased geographic footprint is slightly masking the fact that sales of other products have been on the low side due to continued reluctance by individual businesses to invest capital. Costs savings have been achieved by the restructuring of the French sales and servicing subsidiary and the transferral of management control to the CEO of European activities. This has resulted in a centralised logistics platform and led to savings from reduced stocks and staff numbers.
The Sales and Servicing group is still loss making, but it is much less so than it was last year The results were flattered by a £2.4M profit on the sale of an industrial building, however. The market has remained difficult and sales have been slow and the smaller business is now focussed on supporting the group as a whole.
There are a number of potential issues going forward. One being the fact that most of group revenues are made outside of the UK so fluctuations in the Sterling/Euro exchange rate in particular is a potential cause for concern and the group does not seem to hedge against these changes. Perhaps the more serious concern, however, is the possibility of a government (the French would be of particular concern) to implement centralised image capture for biometric passports. This eventuality is combatted by providing a high quality, affordable service and to conduct lobbying actions with the various governments.
There is now a much more even spread of cash between Sterling and Euro when previously the large Euro reserves meant that the group may have been more susceptible to exchange rate fluctuations. The majority of the profit is made in continental Europe, but profits in Asia are increasing quickly (from £3.9M to £5.7M) and it is worth noting that so far the financial crisis in the Eurozone does not seem to be adversely affecting profits in this region.
Going forward, the first seven weeks of trading are in line with expectations and with the Sales & Servicing issues apparently sorted and the roll out of the modernised Photobooths, plus the roll out of the new laundry machines, the future is looking rather promising currently. The group are also continuing to eye new markets and have plans to expand into Thailand and Ukraine.
Overall then, this is a very positive set of results. Profits were up by £3M to £17.6M but £2.7M of this increase was due to the sale of a building and a lot more was due to less depreciation. The net assets are very healthy indeed and it is pleasing to see that almost all of the debt has been paid back. Indeed, net cash is now a remarkable £58.9M, an improvement of £9.5M from last year. The balance sheet does show that there are likely to be some costs associated with legal actions and ex-employee actions which may affect results slightly next year. The £5.4M cash inflow is very pleasing to see, particularly as there was an incredible £12.7M hike in dividend payments. Again, there is some flattering of the numbers, however, as £3.7M came from the sale of that property and £5.7M was from the sale of treasury shares.
Operationally, the Photo booths are doing very well and the washing machines seem to have some real potential. The P/E currently 19.5, which is certainly not cheap but going forward it is 16.8, which is a little better. At current prices, the dividend is 3.2% but there is a special dividend of 3p that increases the actual yield to 6.4%. Next year the board have already signalled their intention to increase the dividend by another 20% and to consider another special dividend so there is a lot of cash being sent back to the shareholders. I do have slight concerns over the potential for a government somewhere to decide to take ID photos in-house but overall I still see these shares as a weak buy, even at this price.
On 12th September, the group released a management statement. It was reported that they started the year well. Group turnover was slightly lower than the same period of last year, mainly due to lower revenues in the Sales and Servicing division and adverse currency translations in Japan due to the weakening Yen. Despite this, profits were 10% ahead of the situation at the same period of last year. The star performer was the European business, with profits in France significantly ahead of last year as the laundry units begin to make a contribution. The European business also benefited from a 7.5% increase in photobooth numbers. UK profits were flat and Asia declined 15% due to the previously mentioned currency issues. The underlying performance was strong and was 10% up on a constant currency basis. The Chinese group increased turnover by 30% but was still marginally loss making due to the heavy investment in R&D and new photobooths. There were 52 new laundry machines added during the three month period resulting in a profit of £500K. The net cash position remained pretty much the same from the year end despite increased investment and payment of the interim dividend Overall this is a good update and it bodes well for the year ahead.