Photo-Me: Evolving snapshot of a cyclical dividend stock

On the surface, what’s not to like if a company hikes its annual dividend by 20% to 8.44p per share, as London-listed photo booth to laundry machine services provider Photo-Me (LON: PHTM) has recently done. 

However, behind the scenes, the company is attempting to reshape its business in more ways than one. In May 2018, Photo-Me warned its pre-tax profit would miss expectations for the full-year ahead, reflecting a challenging market backdrop in Japan, where a spike in the number of photo booths impacted its takings.

The company has set about restructuring the unit via an overhaul of regional management and the relocation of machines with low sales. Stéphane Gibon, Chief Financial Officer of Photo-Me, says the company could also consider buying competitors in the Japanese market to drive consolidation.

But the issues in Japan should not necessarily detract from gains elsewhere. For instance, Photo-Me booked a gain of £3.7m in its last fiscal year, courtesy of the group's shareholding in Max Sight Group Holdings, an automatic identity photo booth operator in Hong Kong.

The standout bit of the company's portfolio has been its growing laundry services business, with sales up 69% on an annualised basis to £36.7m. In fact, the business now accounts for 16% of group sales, up from an average of 10%. Sensing an opportunity, Photo-Me intends to up its game by increasing the number of laundry units in operation to 6,000 by 2020, from a current level of 4,449 units. 

But all things considered, underlying pre-tax profit, for the 12 months to April, only inched up 0.3% to £46.8m, while falling 1.6% on a constant currency basis due to margin pressure. The figure has left many market commentators in doubt even though headline revenue rose 7.1% to £229.8m.

The sentiment is reflected in the company’s share price which has oscillated by a fair amount for much of the current trading year. From a level of 186.20p at the start of the trading year (2 January), the price fell to 110.20p on 16 July, giving Photo-Me a market cap of just over £416m. 

The stock’s 52-week range of 101p to 194p is even broader, given the cyclical nature of its business and market doubts created by its trading update earlier in the summer.

On the plus side, Photo-Me’s management has been quite vocal about their attempts to up the company’s game. Their response to the slide in its Japanese business offers a case in point. Apart from expanding its laundry business, Photo-Me says it is also focusing on “expanding government partnerships” for its identification business.

The move has several facets. While there is a risk the UK’s departure from the EU could hit photo identity market growth, Photo-Me justifiably feels it could benefit in the short to medium term by an influx of “blue passport renewals” – the UK’s new passport – following its planned departure from the union in March 2019. 

The government partnerships also involve the adoption of Photo Me’s secure ID upload technology in new countries, and forms part of its digital expansion. Finally, a weaker pound sterling could also boost the company’s takings even if the benefits are not quite as clear cut. Overall, Photo-Me is heading for an interesting 12 months of trading.