Photo-Me International have now released their final results for the year ended 2018.
Revenues increased when compared to last year as a £4.4M decline in Asian revenues was more than offset by a £10.1M growth in UK revenues and a £9.5M increase in European revenue. Depreciation was up £2.4M, inventory costs increased by £10.1M, staff costs were up £1.6M, own work capitalised decreased by £2.7M and net forex gains decreased by £2.5M. Other cost of sales declined by £9M, however, to give a gross profit £3.5M higher. The group made a £2.3M profit from the sale of their head office but saw £2.6M of restructuring costs, saw rental income fall by £517K and other admin expenses up £3.1M which meant the operating profit was £701K lower. The group made £3.7M from the disposal of investments but other financial income was down £1.2M. After tax charges fell by £3M due to a rate reduction in the UK and tax initiatives in France, however, the profit for the year was £40.1M, a growth of £5.1M year on year.
When compared to the end point of last year, total assets increased by £41.9M driven by a £14.2M increase in the value of photobooths and vending machines, an £11.2M increase in cash, a £4.2M growth in current tax assets, a £4.2M increase in financial assets held for sale and a £3.8M growth in inventories. Total liabilities also increased during the year due to a £23.1M growth in bank loans, a £4.1M increase in current tax liabilities and a £2.7M growth in trade payables. The end result was a net tangible asset level of £117.4M, a growth of £13.4M year on year.
Before movements in working capital cash profits increased by £4.1M to £65.6M. There was a cash outflow for working capital but tax payments were down £3.7M so the net cash from operations came in at £52.3M, a growth of £3.3M year on year. The group spent £1.4M on acquisitions, £3.2M on intangible assets and £40.4M on fixed assets, although they recouped £4.7M from the building sale. This gave a free cash flow of £12.8M. This did not cover the £26.5M paid out in dividends so the they took out a net £22.7M of new borrowings to give a cash flow of £11M and a cash level of £58.7M at the year-end.
Overall profits rose by 4.4% but this included a one-off investment gain of £3.7M relating to the shareholding in Max Sight and a £2.3M profit on the sale of the head office building, although they also included restructuring profits of £2.6M. At constant currency, profits were up just 2.5% and the underlying profit at constant currency declined by 1.6%.
The operating profit in the Asian division was £5.4M, a decline of £3M year on year with revenues down 8.8% reflecting the oversupply of photobooths in the Japanese market following the lower than expected take up of the new ID cards. The Japanese laundry market remains attractive due to lifestyle and other market dynamics and the size of residential housing where a lack of space makes it impractical to have a washing machine at home. The priority is to restructure the Japanese subsidiary before embarking of further expansion, however.
The operating profit in the European division was £31.9M, a fall of £2M when compared to last year due to non-recurring profits last year and an increase in costs this year partly due to higher R&D costs. Revenues were up 8.5%, driven by the rollout of the laundry operations in France, Portugal and Spain.
In France, 5,700 photobooths have now been upgraded with their secure and direct data transfer technologies for ANTS driving licence applications. These machines are performing well. The gradual rollout of the secure and direct data transfer technologies in Germany continued. The group are exploring opportunities to expand the range of services available via their photobooths and have entered into discussions with the Dutch government regarding deploying their direct transmission photo ID technology in the Netherlands.
In France, this technology has been deployed for driving license renewals for more than one year and they are now in discussions with the government to extend the technology to renewals and new passports and ID cards.
The laundry operations have expanded in France, Belgium, Portugal and Spain which resulted in a 40% increase in the number of operated laundry units. Much of the laundry expansion has been focused in France and Portugal where results have been encouraging. In France, new Revolution machines installations increased by 31% and revenue increased by 42%. In Portugal there was a 39% increase in revolution machines installed and a corresponding 56% inc4rease in revenue.
In Continental Europe they operated 63 unattended launderette shops compared with 44 at the end of last year. These sites have traded well in the period and they continue to see further opportunities to grow their launderette presence. They have set up Speedlab cube and Speedlab bio kiosk units at high footfall premises.
The operating profit in the UK and Irish division was £10.4M, a growth of £3.1M when compared to 2017, with revenues up 18%. Fowler, the commercial laundry and catering equipment business, along with Inox and Tersusm made a contribution of £1.3M to profits. This performance reflects the continued expansion of the laundry operations in Ireland and the UK and their B2B offering, as well as the rollout of the secure digital upload technology for the Irish Online Passport. Much of the laundry expansion has been focused on Ireland with a 67% increase in revolution revenue.
They continued the deployment of their encrypted photo ID upload technology for the Irish Online Passport Application Service, with 300 units now upgraded. In the UK they concluded discussions with the Passport Office regarding the deployment of this upload technology for its new online passport renewal service and in December they started the rollout of this technology to their UK photobooths. At the end of the year it had been deployed to 2,200 and they plan to deploy 4,000 by the end of December.
They continue to make good progress in expanding their laundry business, with 183 revolution units deployed in the period. They are looking for further sites including petrol forecourts, supermarket car parks etc and are in discussion with some major retailers. In July 2017 they acquired Inox and Tersus in the UK which provide design, procurement and installation of laundry and catering facilities for companies and institutions such as care homes and hospitals. These laundry units are either sold or operated by the group. Their intention is to merge the three UK B2B acquisitions to become the second largest operator in the UK in this sector.
In Q4 they reviewed the progress of their Photo-Me Retail Operations (the Asda acquisition) in order to reshape the digital printing operations and boost profitability. As previously announced, the decision was taken to refocus the business as an online and unattended digital printing kiosk service. As a result all the manned retail outlets have been closed. The board remains confident that the action take will improve the future profitability of these operations and the business is now profitable.
Excluding Japan, revenue for the ID business grew by 1.2% but including Japan it was down 1.9% to £149.3M. Total revenue for the revolution machines increased by 49% to £21.2M. The group increased its revolution estate by 32% globally and the continued, further accelerated, growth of this estate will be supported by increased production capacity. In H1 of this year, their manufacturing partner transferred production from Hungary to Poland, enabling them to increase production volumes. The early benefits of these additional volumes started to come through towards the end of the year.
The profit of the group’s B2B laundry services amounted to £1.3M and they continue to seek out further acquisition opportunities with a focus on continental Europe. In May they acquired La Wash, a Spanish B2B laundry provider, for a consideration of €4.8M. The business, which is a franchise model, had a pre-tax profit of €796K last year. Kiosk revenues increased by 24% to £16.5M, mainly due to the reorganisation of the retail sites where they have replaced manned sites with unattended vending machines.
The Japanese photo ID market continues to be highly competitive, with the highest density of photobooth units per person in the world. The number of booths increased significantly following the launch of the government’s My Number ID card programme but this is not compulsory and has now gained the momentum operators initially anticipated. During the coming year the group will invest in a thorough restructuring of the Japanese subsidiary which is expected to improve profitability going forward.
The planned restructuring will involve a management reorganisation, rationalisation of admin functions, the relocation of low revenue machines and removal of unprofitable units. In addition, the group will introduce a new photobooth to the country, the production of which is significantly cheaper than previous units deployed. The board expect these initiatives to enable their Japanese business to return to growth in the medium term and the underlying profit expectations for 2019 take into consideration this restructuring cost.
The group are in discussions with financial institutions to provide front-end retail banking services to customers via their photobooth network. The board believes this technology supports the changing dynamics for the retail banking industry and the need for financial institutions to use lower cost platforms to maintain their traditional network. In addition they also continue to identify opportunities to extend their biometric and 3D capture technology.
In July the group completed the sale of its head office building in Bookham. The freehold was sold to Shanly Homes for £2.5M which resulted in a profit on sale of £2.3M. The disposal was part of the group’s review of their property portfolio and consolidated their head office and UK operations into one location. The new HQ is in Epsom.
Going forward the board expect the laundry operations to contribute an increasingly significant share of group profits as they expand within existing markets and penetrate new ones. Alongside this, they expect their ID business to maintain its strong performance and their main focus will be on increasing their government partnerships for their secure ID upload technology. They expect their photobooth estate to continue to deliver steady cash flows.
In the UK, whilst there is a risk that departure from the EU may affect photo ID market growth, in the short term the group may benefit from an influx of blue passport renewals requiring photo ID. Furthermore, the group would benefit from forex translation if sterling were further devalued against the euro. Taking into account the restructuring of the Japanese subsidiary, the board now believes that pre-tax profit will be at least £44M and the board remain confident for the future.
At the current share price the shares are trading on a PE ratio of 12.3 which falls to 11.6 on next year’s consensus forecast. After a 20% increase in the total dividend the shares are yielding 6.9% which increases to 7.6% on next year’s forecast. This is in response to an earlier pledge a couple of years ago to increase the dividend by 20% in both 2017 and 2018. I suspect, given the current market conditions that the regret this slightly and are keeping the dividend flat for 2019. At the year-end the group had a net cash position of £26.7M compared to £39.2M at the end of last year.
On the 13th September the group announced that non-executive director Francoise Coutaz-Raplan sold 250,000 shares at a value of nearly £300K. He now owns 200,000 shares in the company.
On the 14th September the group announced that it had completed the sale of its 50% stake in Stilla Technologies, a French biotech company. The holding was acquired for €1.5M in 2015 and was sold for €5M. The sale on investment is €3.5M and proceeds from the sale will fund the group’s growth strategy.
On the 24th October the group released a trading update covering the first five months of the year which has been in line with expectations. Deployment of the encrypted photo ID upload technology has continued to progress well. In the UK, a total of 2,700 photo booths are now enabled for passport renewals and they are targeting 4,000 by the end of December.
In France, more than 80% of their photo booths have been upgraded with secure photo ID transfer technology for driving license renewals, and this should be deployed to all of them by the end of December. Discussions are continuing with the French government to extend this technology to include photo ID for new passports and ID cards. The group is also in advanced discussions with the Dutch government to deploy this technology in photo booths in the Netherlands for use in driving licenses.
In Japan the group has implemented its plan to restructure the subsidiary with a management reorganisation being completed. In addition, admin functions have been streamlined, low revenue machines have been relocated and unprofitable units have been removed. New units deployed will have significantly lower production costs which will offer a 35% faster ROI. Whilst the market in Japan remains very competitive, the benefits of the restructuring are becoming evident earlier than expected and the board is confident it will return to growth in 2019.
The group expects to benefit from a £700K contribution from the acquired La Wash business in 2019. Expansion of the revolution laundry operations has continued strongly, particularly in Portugal, Ireland and France, and there has been good expansion in the UK. They are investigating deployment of laundry operations into Germany and Italy.
The kiosk market is stable and has continued to perform as expected. In line with plan, the board expects the acquired Asda business to be profitable in 209 as the benefits of the actions taken last year come through. They will continue to opportunistically expand their kiosk presence and will present innovative products based on direct connectivity with smartphones. The first banking booth, which will provide front end retail banking services to customers will be piloted in Paris in collaboration with Anytime, a Belgian Fintech company.
The board maintains its guidance for the full year. Results for the first half will be in line with those of last year, excluding an exchange gain and a favourable litigation outcome in 2018 (so slightly below then).
Overall then this has been a rather difficult year for the group. Profits did increase but this was due to a lower tax charge and sale of investment with operating profits falling. Net assets continued to rise and the operating cash flow improved. The group did make some free cash but this didn’t come close to covering the dividends.
The Asian business struggled due to the oversupply issues in Japan, although this seems to be being remedied ahead of expectations. The European business saw a surprise (for me) fall in profits which was apparently due to increased costs which haven’t worked their way into revenues yet. The UK business performed quire well, however, boosted by the business to business laundry operations.
The shares are now looking quite cheap with a forward PE of 11.6 and yield of 7.6% but it seems clear that this business is not growing at the moment and given the cash hungry nature of the company and the growing debt to cover the dividends, that yield can’t really be sustainable. At least, the sensible thing would be to cut it. The value tempts me but this company seems to be running very hard to stand still, flogging off their investments and office buildings. I don’t really see this as a great investment at the moment.