Octogenarian chief executive Serge Crasnianski took a shine to Photo-Me’s shares during the pandemic by lifting his stake by 20m to 105.6m shares (28% of the equity). Regular readers will know that following his lead in the past has worked very well, most notably on SCSW, where we multi-bagged on the shares back in 2002; we featured the shares at prices as low as 10p before they peaked at 190p.
Photo-Me is best known for its estate of high street photobooths, which help consumers get Government approved photo ID for their travel documents, but in recent years Crasnianski has moved the business into newer areas of vending equipment. The first was digital printing kiosks (allowing shoppers to print their own photos from their phone or a SIM card). More recently a third pillar has emerged with an estate of self-serve laundry machines located in supermarket car parks but speaking to finance director Stephane Gibon last month, the latest pillar initiative is food vending. Photo-Me has already started roll out of machines to dispense freshly squeezed fruit juice and pizza 24x7.
Five upgrades since last April
I think that a potent combination of new technology development, the outsourcing of manufacture to reduce build costs, reduced staff costs, control of the revenue share paid to site owners, as well as food service equipment being leased to site owners as opposed to operated by itself could all contribute once again to margins rising sharply.
In the year to April 2018 (the year the shares peaked), EBITDA was £71.3m with EBITDA margins of 31%. Comparisons are slightly complicated as there has been a change in the year end but brokers’ forecasts have started to play catchup with five upgrades since the middle of last year.
In the light of the latest trading update in December, Canaccord upgraded its forecast by 6% for the year already ended October 2021 to EBITDA of £63.5m and pretax profit of £29m (eps 6.2p). For this year, their forecast is £74m EBITDA and pretax profit of £38m (eps 8p). Ebitda margins look well set to push back to record highs. Cash flow too has been spectacular, with net cash at October £33.8m, up from £16.9m last April.
The forecasts are powerfully supported by better trading in every segment. The photobooth side is recovering from the past two years when travel was restricted. On the laundry side, consumers are more worried about hygiene, which has led to an uptick in laundry machine usage. Meanwhile, rollout of the food side was curtailed when restaurants were shut during Covid related turbulence but will accelerate as normal business resumes.
In-house design function
Photo-Me has been listed since 1962. The original idea for coin operated photobooths came from a US company but Photo-Me became the dominant operator in the UK (with machines manufactured by itself).
The key deal that lifted Photo-Me into the top level in professional photo developing equipment was the merger with French company, KIS, back in 1994. KIS’ founder (and also its inventor), Serge Crasnianski, became chief executive in 1998 and apart from a brief sabbatical in 2008-9, he’s been running the business ever since.
His KIS business initially brought into the fold an inhouse product design and manufacturing operation. A major restructuring subsequently saw all manufacturing transferred to an outsourced facility in Hungary leaving a product design kernel, which has helped shift the business outside the ID market.
Simple formula
Since the early days, Photo-Me has had a very simple formula. It would invest in its own photobooths and then reach an agreement with site owners (retailers, railways, airports and so on), who would be paid a commission based on sales (average commission rate c.20%). Photo-Me uses a network of 650 home-based personnel to collect the cash and maintain the consumables, things like the ink and the photographic paper.
These days, however, photobooths are considerably more sophisticated with internet connectivity and telemetry built into the units to ensure high up-times, lower running costs and new features. About 60% of the estate of photobooths are its Philip Starck generation (incorporating touchscreen, webcam and virtual reality options). Some of the more sophisticated booths go a step further and can have as many as eight cameras that can also collect biometric information (eg, the shape of your head, distance of your pupils and so on) and even allow a digitized e-photo and signature to be automatically uploaded direct to the government departments from the booth via a secure server.
Major restructuring during pandemic
When the pandemic hit two years ago, the photobooth side suffered quite badly. The estate, which is typically situated in high-footfall locations such as transport hubs and shopping centres, was impacted by reduced footfall and with international travel restrictions in place, when a passport expired I suspect many people didn’t immediately get round to renewing or applying for the new post Brexit passports.
Even before the pandemic the UK had been struggling and this had triggered management to come across from France to instigate change. When the pandemic then hit, they knew exactly what needed to be done. Photo-Me launched a restructuring programme to remove or relocate 3,800 unprofitable machines across the UK and it also took the opportunity to remove another 1,200 in China, South Korea and Continental Europe. As a result, Photo-Me booked £23.7m of exceptionals, provisions and impairments (including a £19.3m impairment of goodwill and write-down of non-profitable machines).
In its slimmed down form Photo-Me has approx 28,000 photobooths worldwide, roughly split between three big territories; Europe 13,000, UK /Ireland 4,500 and Asia (particularly Japan, China and Korea) 10,800.
Some subscribers will be wondering exactly why things have suddenly changed for the better. There are two reasons. First, excluding Asia, there has been good progress in returning to pre-pandemic performance levels in the last months of 2021. The restructured UK business in particular is benefiting from a lower cost base and the elimination of unprofitable sites and has bounced back strongly.
Second, the largest territory within Asia is Japan, where last year the government incentivised the public to take up recently introduced ID cards, which required them to have a new photo. With a population aged 18+ of some 87 million and a requirement to have the card in order to receive state benefits including Covid-related payments, take-up of the ID card took off in Q3 and high demand continued in Q4. It would have been even higher but for some Covid restrictions introduced in Asia.
A third less important factor is that although photobooth numbers are expected to be fairly static (capex is mostly maintenance), Photo-Me is entering new markets such as Italy and Finland and has also made a small acquisition in Australia.
Diversification outside the ID market
Alongside photobooths, Photo-Me’s Kiosk side continues to operate over 7,500 kiddie rides worldwide and 4,700 digital printing kiosks, primarily in France and Switzerland. But, if anything, it is the investment in diversification outside the ID market that is a strategic priority and within this the laundry machines represent the biggest element of roll-out.
It was back in 2013 that Photo-Me first unveiled the Revolution laundry machine for washing and drying large laundry items. With £8m invested in the estate, last year there were c3,700 machines (8.4% of the overall vending estate) in the field with the biggest density in France, Belgium, UK and Germany, most of which are located in supermarket car parks. Customers turn up to use these machines mainly because their domestic machine is simply too small to wash a duvet and with a short 30 minute spin cycle, they can have these items washed whilst out shopping.
Like photobooths, manufacturing is not in-house but has been transferred to an outsourced supplier, which has sent build costs down. Gibon notes that the typical annual sales per machine are €18,000 and because Photo-Me can leverage the same photobooth field personnel to collect the cash and fill machines with soap, there isn’t really much incremental cost attached. This, plus a relatively low sales commission to site owners, gives it eyewatering 70% ebitda margins and a payback of 1.5 years. This is real gravy. The latest first half saw 55 machines being added a month but the plan is to resume to 70 per month as lockdown restrictions ease.
Self service food equipment
What is also set to push up margins is the move into self-service food equipment from a low base at retail sites.
To spearhead the move, in 2019 Photo-Me acquired Sempa and outlined a plan to dominate the US$154bn fresh fruit and vegetable juice market. As I am learning, whole fruit gets loaded and the equipment dispenses freshly squeezed juice.
Photo-Me didn’t want to go around filling machines with oranges, apples and pineapples; instead, it operates a lease model, whereby it sells equipment (€2,500) to customers via lease finance agreements and leaves it up to them to replenish machines with fruit.
Under its agreements, Sempa receives full payment upon sale of the equipment and the lease finance contracts are then subject to renewal every 13 months on average, when it receives the same income once again. It finds that 70% of customers renew beyond the original term. Machines that get returned are simply refurbished and then sold to a different customer.
Since entering the fruit market, Photo-Me has made a second acquisition of Resto’clock pizza machines, which dispense fresh pizza 24x7. It deploys these under contract purchase leases.
Last year had seen the food division impacted by the widespread closure of restaurants and hotels due to the pandemic. Roll out stopped when the pandemic struck and there are currently 2,700 food service machines in the field, virtually all of which are juice. But things are beginning to improve and the plan is to be back to selling c.100 food machines per month by the end of 2023, says Gibon, adding that selling fruit juice or pizza machines via a lease generates higher EBITDA margin than that which would come from operating machines itself. An exciting time to return to the Photo-Me story; buy.
