There are two ways one might start an investment article on Photo-Me International (LON:PHTM).
The first is to quote the chief executive, the irrepressible Serge Crasnianski, and his claim to have turned the photo booth operator into a cash machine.
The second might be to ask investors to raise their hand for the Revolution.
The latter is the more cryptic of the two to decode, but refers to the Revolution laundry system the group is rolling out in France, Belgium, Ireland and Portugal.
It has the potential to be the major growth driver for the business over the next few years.
The cash machine reference speaks to the firm’s ability to generate significant amounts of money yearly that should ensure generous income distribution for the foreseeable future.
The £64mln it has currently in its coffers is enough to cover the dividend for the next four years – and the yield is a very solid 3% before the inclusion of special dividend payments.
Most people will have heard of Photo-Me and seen its photo booths inside shopping centres and on train concourses. It has 26,000 in 15 countries and the machines helped generate £186.6mln of sales in the last 12 months and adjusted profits of just over £30mln.
The group’s overall revenues have been depressed over recent years as it stopped manufacturing photographic mini-labs, although a return to top line growth was seen in the recent results for six months ended last October, albeit on a constant currency basis.
In all it has 43,000 vending units and its product range also includes digital printing kiosks, children’s rides and the washer-drier units.
While a small part of the business currently, the diversification into laundry services could provide a significant source of new income.
The acid test of a new product for the company, be these outdoor laundrettes or the new line of car-washes being trialled, is it must have a one-year payback on the initial investment.
Most of Photo-Me’s equipment is depreciated over five years but usually has an active shelf-life of 10 to 15 years.
“This is the spirit and essence of the company,” CEO Crasnianski told Proactive Investors.
“It is a very simple strategy, but it is difficult to find the products that deliver this, and it is difficult to find acquisitions that do this.
“We are extremely visible. It means we are a cash machine that has no bad debt; in fact no debt.”
The Revolution laundry system, now manufactured in Hungary, is the same dimensions as a container that fits on the back of most articulated lorries.
It consists of three drums, a standard 8kg washer, a larger 18kg cylinder and a drier.
The units sit predominantly outside supermarkets, which maximises footfall and also means the users are able to dump their load before going off on the weekly shop. A text from the machine provides a five minute warning before the cycle ends.
As well as being more convenient than traipsing all the way to the local laundrette, it is also around 30% cheaper.
As at the end of October, Photo-Me had deployed 744 units outside the major grocery chains. In France, which was used to test the concept, the units are really gaining traction. In Portugal and Ireland, they are growing fast and they made up around 20% of revenues in these territories in the six months to October 31.
Such is the demand, a second production line has just been opened and the rate of production is progressively increasing towards 100 a month and the target by the year-end is to have one of these pop-up laundrettes at around 2,000 locations.
“Of course there is potential to roll out many more. This is a unique concept. We don’t have any competition,” said Crasnianski.
“And for the competition to come in it is quite difficult: we have the patents, system and the team to maintain the business as well as the relationships with the supermarkets.”
The group, which has 8,000 photo-booths in France, has the capacity to install perhaps as many as 4,000 laundry units in this one territory alone, analysts estimate.
With so much cash in the bank it would be tempting to go out and splurge on new products to add to the roster, but while it has looked at bolt-on deals, Crasnianski points out very few pass that very strict hurdle criterion of payback of the initial investment in just one year.
Instead Photo-Me is creating a pipeline of its own new products. They include the aforementioned car-washes and the debut for a photo booth that can create a 3D figurine.
“You go to the booth, take your picture and have the puppet one week later,” explained Crasnianski.
Currently that might cost £100-£200. Photo-Me plans to offer the “perfect mini-me” for £15.
“If we take an order for one puppet a day then we double the revenue of the photo-booths,” the Photo-Me boss revealed.
The broker finnCap is forecasting sales of £195mln for the year to the end of April, rising to £205mln, which generates profits of £35mln then £40mln.
Analyst Mark Paddon said Photo-Me is projected to deliver two-year growth of 33% and a hike of 30% to the 2015 dividend (before special payouts); this, and the roll-out of the laundry system, leaves it primed to continue deliver the “exceptional returns” seen to date.
Joint house Liberum reckons the stock is worth 160p, which it admits places it on a premium rating to its peers.
But as analyst David Brockton pointed out: “Photo-Me has transformed its returns through focus on its operation of photo booths, significant cost reductions and selective pursuit of new complementary growth opportunities.”
“This has already driven significant improvement in return on invested capital, but further gains should be achievable.
“The valuation stands at a market premium, but the business model risk is low and we believe there is potential for increased cash returns.”