Photo-Me has now released its final results for the year ended 2019.
Revenues decreased when compared to last year as a £9.6M growth in European revenue was offset by a £10.8M decline in UK revenue and a £455K fall in Asian revenue. Amortisation was up £224K and depreciation increased by £1.7M but inventory costs were down £4.1M and staff costs fell by £2.8M to give a gross profit £1.7M above last year. Restructuring costs were down £805K but there was no profit on the sale of buildings, which brought in £2.3M last time and other admin expenses were up £3.4M to give an operating profit £3.4M lower. The group made £3.3M on the disposal of Stilla Technologies but made £3.7M less on the disposal of investments and made a £2.9M loss on the fair value of financial instruments which meant that the profit came in at £31.2M, a decline of £8.9M year on year.
When compared to the end point of last year, total assets increased by £33.1M, driven by a £13.2M growth in goodwill, a £25.9M increase in cash, a £2.4M growth in financial instruments, a £2.2M increase in other receivables and a £1.6M increase in other intangible assets, partially offset by a £6M decrease in financial assets, and a £3.6M decline in current tax assets. Total liabilities also increased during the year as a £2.6M decline in trade payables was more than offset by a £34M increase in loans and a £2.8M growth in deferred tax liabilities. The end result was a net tangible asset level of £102M, a decline of £15.4M year on year.
Before movements in working capital, cash profits increased by £4.1M to £69.6M. There was a cash outflow from working capital but tax payments fell by £2.1M to give a net cash from operations of £57.2M, a growth of £4.8M year on year. The group paid £13.5M for an acquisition, £2.2M on intangible assets and £28.2M on property, plant and equipment but brought in £4.4M from the disposal of an associate, £1.6M in loans repaid by the associate and £2.3M on the sale of property, plant and equipment to give a free cash flow of £21.6M. Of this, £31.9M was paid out in dividends and £8.4M was repaid in loans but once again the group took out a big loan, pulling in £43.7M which meant that the cash flow was £25.9M and the cash level at the year-end was £84.6M.
Overall ID revenue declined by 1.1% due to a more challenging trading environment in the UK and continued uncertainty surrounding Brexit. Consumer activity slowed and footfall in retail locations was lower. In addition the UK government’s decision to allow photo ID to be taken on a smartphone has impacted volumes and around 178 machines were removed from the UK estate due to rising operational costs.
Elsewhere they continued to see a resilient performance aided by the diversification of their photobooth services, including the rollout of their encrypted photo ID upload technology in the UK, France, Germany, Ireland and the Netherlands. In total the group has more than 12,000 booths connected to government organisations for the secure upload of photo ID. The board expects this number to increase as discussions with governments progress.
Total laundry revenue grew by 19% despite a decrease in B2B laundry revenue. This reflects the expansion of their laundry operations with 427 new units installed. The key geographies for growth continue to be the UK, Ireland, Portugal, France and Spain. They are also looking to expand their presence in Germany (currently 20 units) and Austria (2). The board expect to approach 6,000 owned, sold and acquired laundry units by the end of 2020.
The number of revolution units in operation increased by 18% to 2,732 and total revenue from the units was up 30%. La Wash, the Spanish launderettes franchise company which the group acquired in May 2018 contributed profit of £900K as expected. The group’s B2B operations are currently focused on the UK and revenue declined by 39% while last year’s profit of £1.4M became a loss of £100K.
The number of kiosks in operations increased by 1.3% following the relocation of kiosks from Photo-Me retail shops in the UK. Upon relocation in France, revenue increased by 15%. These Speedlab units were refurbished and redeployed to replace previous generation machines. The 19% decrease in revenue is due to removal of 491 kiosks related to the Photo-Me retail restructuring programme.
In Europe, operating profit increased by 5% to £33.5M. The performance of the UK and Ireland was impacted by macro headwinds in the UK which resulted in a 32% decline in profit to £7.1M.
The turnaround in Asia continued but operating profit decreased by 13.5% to £4.7M which included the impact of £1.8M in Japanese restructuring fees. Excluding this, profit was up 20%, recovering faster than expected. While the photo ID market in Japan remains very competitive, the board believes that there are growth opportunities. As a result they intend to start the deployment of their new units, which have a significantly lower production cost and will offer a 35% faster return on investment.
There was revenue and profit growth in Europe and the Japanese business returned to profitability as planned. In the UK, however, their operations were adversely affected by macro headwinds and uncertainty. Overall trading in the UK became more challenging than expected as consumer activity slowed, owing to uncertainty around Brexit. This resulted in lower revenues from business to business and machine sales activity due to delays in order decisions, albeit the board expect part of these revenue delays to be recovered in 2020.
Total revenues from laundry operations increased by 19% and revenue from Revolution increased by 30%. This growth was achieved despite a decrease in B2B laundry revenue and aided by the first year contribution from Le Wash. ID declined by 1%, reflecting challenging market conditions in the UK. Revenue from Kiosks declined by 19% following the restructuring of Photo-Me Retail.
The group acquired Sempa in April for a gross consideration of €20.6M funded by more borrowings. Sempa is the leader in France for the commercialisation of self-service fresh fruit juice equipment and operated 2,788 units. This represents a platform to develop a new business area for the group. The group are looking to replicate the success in France across their existing network with the initial focus on Europe. The business operates via a lease model whereby they sell fresh fruit juice equipment to customers through lease finance agreements. It receives payment on the sale of the equipment and the lease finance contracts are then subject renewal every year on average. The business is expected to contribute pre-tax profits of £3.2M next year.
In November 2018 the group launched their first banking booth which provides front end retail banking services to customers, in Paris, in partnership with Anytime, a Belgian Fintech business. In the long term customers will be able to deposit cheques and cash in the booths and speak directly to bank specialists through the screen. A ten machine pilot is underway in Paris.
Going forward, while consumer uncertainty continues to weigh on their business in the UK, the board remain confident that the group will continue to perform well this year.
At the current share price the shares are trading on a PE ratio of 11.3 which falls to 9.9 on next year’s forecast. After the dividend was kept the same the shares are yielding 9% which is predicted to remain flat next year. At the year-end the group had a net cash position of £16.3M compared to £26.7M at the end of last year.
On the 28th October the group released a trading update covering the first five months of the year. Overall group trading has been in line with expectations, underpinned by growth in Asia and Europe, led by the laundry business. Trading in the ID division in the UK has remained challenging due to continued uncertainty over Brexit and the use of smart phone photos for passports.
Excluding the UK, ID revenue was stable driven by a solid performance in France and Japan. Including the UK, total revenue was down 3.8%. There was revenue growth of 23% in the laundry division. The rollout of Revolution machines in the UK, Ireland, Portugal and Spain has continued at an average of around fifty per month. They also grew their presence in Germany, Austria and Switzerland. In the UK there was an improving trend in B2B activity.
The kiosks business has performed as expected and the acquired Sempa business has performed to expectations. In September the group acquired 150 juice vending machines from L’Orangerie de Paris, enabling them to run a larger scale trial to test the market. In the B2C market the group is initially offering fresh orange juice though the intention is to extend the product range over time. The development of machines for apple and pineapple juice is underway which are expected to be rolled out in 2021.
While consumer uncertainty continues to weigh on their business in the UK, the board remain confident that overall the group will perform in line with market expectations this year.
Overall then this has been a rather mixed year for the group. Profits were down and net assets decreased. The operating cash flow did improve, however, with some free cash being generated but not enough to cover the dividend. The problem at the moment stems from the UK. The decline in B2B laundry (slowly improving) and reduction in ID photos is being blamed on Brexit but the more worrying trend I believe is the Government accepting smart phone photos for passports. The Japanese business and laundry division seem to be performing well, however. There is also the issue here that they are taking on oodles of debt despite having a seemingly increasing cash pile. This still doesn’t sit right with me. The shares look cheap with a forward PE of 9.9 and yield of 9% but I am uneasy about this one.