Interactive Investor

Stockwatch: another share ‘pops’ but is it one to chase or ignore?

This company has been around for decades, and yesterday its shares rocketed 20% after annual results, as investors hunt growth stocks offering value. Analyst Edmond Jackson explains his new rating.

23rd February 2024 11:35

Edmond Jackson from interactive investor

Various shares are “popping” just now, reflecting buoyant market sentiment. Yesterday, the mid-cap vending machines group ME Group International (LSE:MEGP) soared 20% to 160p amid consistent buying in response to annual results to 30 October. The company was called Photo-Me when it introduced photo-booths in 1954.

What a change in mood given the numbers were actually in line with a 30 November financial year-end update, after which the shares had drifted from around 130p to 120p. Management did at least continue to express confidence in revenue/earnings growth, despite the UK recently slipping into recession.

The share is slightly off today at 158p, as if yesterday was quite reactive. I believe it is explained by investors on the lookout for growth stocks offering value now that interest rates are expected to fall. ME’s annual numbers convey so, with the forward price/earnings (PE) multiple appearing modest at around 11.5x and a prospective yield of 4.8%. And that is based on recent forecasts anticipating low single-digit growth to October 2024, which look conservative.

Double-digit growth and strong conversion to cash

Revenue is up nearly 15% at almost £300 million and, while companies usually trumpet EBITDA, here it is up 16% to near £107 million, while net profit has advanced 31% to £51 million and earnings per share by 30% to 13.3p. Cash generated from operations is18% ahead at £104 million.

Such “record financial performance” can be interpreted as an underlying break-out from the group’s long-term trend.

Possibly the market has been cautious for too long, although in a long-term chart context this share is at a relative high in its rollercoaster. The 2008 crisis took it down to 10p before a rally to 175p by early 2018, then a slump to 40p with Covid in 2020. It is now back up to the 160p area seen last June.

This company first listed in 1962 and is currently capitalised at around £600 million, so does that affirm “growth” or should one beware a propensity for setbacks?

A total ordinary dividend of 7.4p marks a 32% rise from 5.6p, but in respect of 2022 a 7.1p special dividend took the total payout to 12.7p. I would interpret omission of a special as bullish, however, given it implies management sees good projects in which to invest rather than distribute cash.

Source: TradingView. Past performance is not a guide to future performance.

From photo-booths to self-service launderette machines

Part of the volatility in the share price is explained by hopes raised six years ago, when Japan – with the highest density of photo-booths in the world – declared a new ID card programme. But this did not prove compulsory and Photo-Me’s Japanese subsidiary had to be restructured.

Investors feared DIY passport photos from phones would replace booths; but I tried this and it is frustrating to find the right off-white background that is light but does not throw up shadows, for a photo to be accepted. ME’s booths can submit photos directly to the passport office. Thus, while their revenue has not always grown, it remains a reliable cash cow for investment and dividends.

In late 2019, the company launched self-service launderettes which initially seemed a bit odd, yet they are common on the European continent where ME derives much turnover from France. The timing was a bit unfortunate given Covid’s disruption, but in the last year laundry-related revenue grew 32% near £82 million – 27% of group total – with the number of units up 16%. Once set up and despite revenue-based commission paid to the car park (or whatever land) owner, they throw off cash.

People who travel frequently say they appreciate this kind of service, also those who want to wash large loads. But if Trustpilot is indicative, reviews of ME’s Revolution Laundry UK polarise between great and scathing – hence 2.6 out of 5, “Poor”. Besides unreliability, a criticism is the service as expensive especially to get stuff dry (if that even happens) hence use a proper launderette. If the machines are seen as unreliable and pricey, they would be exposed to any consumer recession.

Medium-term bullish stance still looks to have legs

I made a “buy” case originally at 50p at end-2020 when the chief executive raised his stake from 23% to 28%. I re-iterated this at 74p in mid-2021 though I tempered to “hold” at 105p in November 2022 amid concern about a possible recession.

The October 2019 financial year had seen some disruption, the annual report blamed on the aftermath of Brexit compromising UK consumer demand, which did not exactly convey resilience.

In terms of operating profit, continental Europe dominates at 79% followed by the UK/Ireland at 16% and Asia-Pacific at 5%. The latter is much lower margin though, given vending machines as a portion of the estate are respectively 55%, 13% and 32%.

Top management is significantly French, as is ME’s European exposure, hence the shares are quite a play on that economy. Interestingly, from this latest year “we also cemented our presence in the Japanese photo-booth market, positioning the group as market leader.”

Despite the table since 2015 posing some questions about “growth” company status, I find it hard to argue with the double-digit financial momentum in the last financial year. This should no longer be benefiting from operational recovery post-Covid.

ME Group International - financial summary
Years to 30 Apr until 2020
 then to 31 Oct

 201520162017201820192020202120222023
Turnover (£ million)177184215230228215214260298
Operating margin (%)

21.7

21.621.820.118.73.013.721.822.7
Operating profit (£m)38.439.746.846.142.76.429.356.767.5
Net profit (£m)27.929.135.040.131.21.221.738.850.7
EPS - reported (p)7.47.79.310.68.30.35.710.213.3
EPS - normalised (p)8.17.89.110.78.04.55.710.313.3
Operating cashflow/share (p)10.610.713.013.815.113.514.219.827.6
Capital expenditure/share (p)6.36.511.511.58.07.77.69.313.7
Free cashflow/share (p)4.44.21.52.37.15.86.610.513.9
Dividends per share (p)4.95.97.08.48.40.02.95.67.4
Covered by earnings (x)1.51.31.31.31.00.02.01.81.8
Return on capital (%)28.331.625.520.53.72.014.725.020.2
Cash (£m)58.671.047.558.784.665.599.4135111
Net debt (£m)-58.4-60.2-36.8-25.0-15.48.7-34.9-33.0-20.6
Net assets (£m)104122128143142114128133159
Net assets per share (p)27.732.434.037.937.629.733.935.142.3

Source: historic company REFS and company accounts.

Are growth drivers dependable?

Management speaks of “many initiatives we are driving forward, underpinned by our strategic focus on digital innovation” albeit financially the progress is being driven by demand for laundry and ID photographs. With political elections increasingly requiring ID, the booths should benefit.

Fresh fruit juice and pizza vending machines are as yet small in context (below 4% of EBITDA) but management proclaims it is an attractive proposition and wants to become market leader in Europe. It would seem a competitive area versus all the pizza outlets for example.

Digital printing kiosks I recall Photo-Me introducing some 25 years ago, so I am yet to be convinced of their growth when only £11 million revenue was achieved last year.   

To be picky: despite a financial year-end nearly four months ago, no real insight is offered on current trading other than pleasantries of a confident outlook for growth. To re-iterate a “buy” stance, I should have liked more detail, especially on the UK.

We expect, but are yet to know, if interest rates will come down usefully, and even in Europe there could yet be more lag effect of high rates to tackle inflation.

Yet arguably the share’s rating prices in such concerns.

Mixed aspects of corporate governance

Back in 2010, the company was fined £500,000 for not telling shareholders of weaker performance in a timely manner, although strictly there was no regulatory breach. This was controversial given shareholders picked up the tab for directors falling short of good practice, additional to a circa 25% share price drop.

Be aware, this is quite a family business. The CEO as 36.6% shareholder is deputy chair also, which concentrates power, and his daughter is on the board as head of legal. His son is head of commercial operations in the executive team. Yet arguably the financial results show a family business culture working well.

With yesterday’s results, ME was also a model example of transparency – the finance director and head of commercial both being open to questions from anyone via an online presentation.

Fresh buyers should benefit especially if the economy improves. Overall, though, I think a strong “hold” stance is appropriate.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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