Photo-Me has now released their interim results for the year ending 2019.
Revenues decreased when compared to the first half of last year as a £4.3M growth in European revenue was more than offset by a £6M decline in UK and Irish revenue and a £745K fall in Asian revenue. Depreciation and amortisation grew but other cost of sales declined to give a gross profit £2.7M lower. The group did not make the £2.2M sale of land that occurred last time, there was a £1.2M detrimental swing to forex movements and other admin expenses grew by more than £1M which meant that the operating profit was £7.2M lower. The group did gain £3.2M on the disposal of Stilla Tech but suffered a £2.7M mark to market loss on the Max Sight valuation. Other finance costs also increased but tax charges were down £2.8M to give a profit of £20.1M, a decline of £4.1M year on year.
When compared to the end point of last year, total assets increased by £20.1M, driven by a £29.9M increase in cash, a £4.5M growth in goodwill, a £1.6M increase in financial instruments and a £1.3M growth in property, plant and equipment, partially offset by a £4.5M decline in current tax assets, a £6M fall in financial assets, a £3.8M decline in receivables and a £2.5M fall in inventories. Total liabilities also increased during the period due to an £23.5M growth in borrowings and a £10.5M increase in payables. The end result was a net tangible asset level of £103.1M, a decline of £14.3M over the past six months.
Before movements in working capital, cash profits declined by £992K to £39.2M. There was a cash outflow from working capital so the net cash from operations came in at £31.1M, a decline of £3.7M year on year. The group spent £4M on acquisitions but received £4.4M from the disposal of an associate and £1.6M from the repayments of loans advanced to the associate. They spent £1.3M on intangible assets and £12.8M on property, plant and equipment to give a free cash flow of £19.5M. Of this, £14M was paid out in dividend and again the group took out a large chunk of new borrowings (£26.7M) to give a cash flow of £29.4M and a cash level of £88.6M. It is quite hard to understand the reason for the new borrowings in my view.
The operating underlying profit in Asia was £2.7M, a growth of £348K year on year, although Japanese restructuring costs were £1.2M which meant the actual profit was £1.5M, a fall of £859K. Revenue reduced by 3% which was a decent performance given the challenges in the Japanese market. Admin functions were streamlined, low revenue machines were relocated and unprofitable units removed. The business recovered faster than expected and is now performing well. Trading in the other countries in Asia remains strong.
In the second half the group will see the full benefit from the restructuring programme. Whilst the market in Japan remains highly competitive, the board continue to believe there are growth opportunities and they intend to start the deployment of their new units which have a significantly lower production cost than the units deployed previously and will offer a 35% faster return on investment.
The operating profit in Europe was £20.7M, a decline of £1.8M when compared to last year which is being put down to last year’s French litigation outcome. The group remains in discussions with the French government regarding the extension of its secure photo ID transfer technology to include photo ID for new passports and ID cards. Advanced discussions continued with the Dutch government regarding deployment of their technology for use in driving licences in the Netherlands. The laundry business continued to perform well, including a first time contribution from La Wash.
The operating profit in the UK and Ireland was £4.5M, a decrease of £2.8M year on year. This was due to large order lags in B2B and third party sales activities which should be recovered in the second half. The restructuring of Photo-Me retail had a negative impact on revenue and there was some impact on revenue from the removal of unprofitable children’s rides The group diversified its photobooth services with the roll out of secure digital upload technology for Irish Online passport renewal and British passport renewals. In total, 2,950 photobooths are now enabled for UK passport renewals with a target of 4,000 by the end of December.
The acquired business made a pre-tax profit of £315K during the period.
ID revenue increased 1% with a 1% growth in the number of units in operation. The group now has more than 10,000 photobooths connected to government organisations for the secure upload of photo ID and it is expected that this number will continue to grow as discussions with Governments progress. New services have been introduced to a small number of booths in the UK, Ireland and France, enabling customers to scan and copy documents. They are monitoring customer response.
Total revenue from laundry increased by 26%. The rollout of Revolution machines continues with the estate increased by 30%. The UK, Ireland, Portugal, France and Spain remain key geographies for growth and the group is looking to extend operations into Germany and Austria. They are still on track to deploy 6,000 units by the end of 2020.
The number of kiosks in operation have reduced by 7% and revenue from kiosks was down 27%. This was primarily due to the restructuring of Photo-Me Retail, which resulted in the removal of machines located in shops which were closed. These units were transferred to Photomaton in France and have been refurbished prior to being deployed to replace previous generation machines in the country. While the machines have improved revenue following relocation to France, there was a period of time when the machines were not operational.
The board foresees that in the short term the negative impact of the uncertainty surrounding Brexit and the UK economy could also spill over into their UK operations. In the long term, potential re-nationalisation of UK ID documents as well as strengthened immigration regulations could lead to increased requests for the group’s secure ID products.
After the period-end, the first banking booth which provides retail banking services to customers was launched in partnership with Anytime. The first ten booths were opened in Paris, allowing customers to open a bank account and scan in supporting documents. It then takes two days for a new account to be opened once compliance checks have been completed.
In May the group acquired La Wash group, for a consideration of €5M. It is a Spanish business to business laundry service company based in Barcelona. The acquisition generated goodwill of £4.4M. A further £219K of consideration is payable to the vendor of the acquired business.
During the period the group made net gains of £560K which included the gain of £3.2M on the disposal of Stilla Technologies, an associate, and the market to market loss of £2.7M arising on the fair valuation of Max Sight Holdings.
During the period the group has been impacted by reduced B2B revenue and machine sales activity, especially in the UK, where they have suffered from large order lags. They expect this to recover in the second half of the year. The strong performance in Japan and the continued positive momentum of their high margin laundry business gives the board continued confidence in their pre-tax guidance of £44M for the year. Their ability to meet guidance will be reliant on normalised trading conditions in their key markets.
At the current share price the shares are trading on a PE ratio of 10.5 which falls to 10.4 on the full year consensus forecast. After the interim dividend was kept the same, the shares are yielding 8.9% which is forecast to remain the same for the full year. At the period-end the group had a net cash position of £32.4M compared to £26.7M at the year-end.
On the 3rd April the group released a trading update covering the year. Their operations in Europe and Asia are continuing to grow in line with expectations. The strong performance in Japan has continued into the second half of the year, following the reorganisation.
Overall trading in the UK has become more challenging than expected reflecting the slowdown in consumer activity as a result of continued uncertainty around the Brexit negotiations. This has meant that the expected recovery in B2B machines revenue is not now expected to materialise this year. As a result, the board believes that pre-tax profit will be slightly below previous guidance of £44M and will instead be just above £42M.
On the 25th April the group announced that it had acquired a 96% share in Sempa, a French company that specialises in commercialised self-service fresh fruit juice equipment. The gross consideration payable for the acquisition is €20.6M, funded by a new debt facility of €20M (why isn’t the group using its existing cash resources?).
The business is the leader in France for the commercialisation of self-service fresh fruit juice equipment. They operate via a lease model whereby they sell equipment to customers via lease finance agreements. They receive full payment on sale of the equipment and the lease finance contracts are then subject to renewal every year.
Sempa’s pre-tax profit last year was €3.7M and it had gross assets of €9M. The acquisition is expected to be earnings enhancing in 2020 and is expected to contribute around €3.7M in pre-tax profit.
Overall then this has been a bit of a tricky period for the group. Profits were down, net assets decreased and the operating cash flow declined. The group apparently made a decent amount of free cash but the cash position here continues to confuse me. Why take out more loans when there appears to be a huge amount of cash on the balance sheet. I don’t understand. The underlying business in Europe seems to be performing decently, and the performance in Japan seems to be recovering more quickly than expected.
Brexit-related uncertainty is putting a drag on UK results, however. The Sempa acquisition seems good, but again why take out more loans when the group could easily afford it out of their cash reserves? The shares look good value, with a forward PE of 10.4 and yield of 8.5% but I just feel a little uneasy.