Dividend and growth hunters alike often seem keen on Lloyds Banking Group, but I’m worried about the firm’s cyclicality. Instead, I’d rather go for this stock’s value and growth potential.
I last looked at instant-service vending equipment business Photo-Me International (LSE: PHTM) in July 2018 after the shares had plunged 40% on the back of a profit warning. Back then I asked the question: “Should I buy the glitch and pile into this 7%-yielding small-cap?”
Further slippage
Sadly, the stock has slipped a further 23% or so since then and is weak today on the release of a trading update. However, I reckon the ‘value’ opportunity is becoming more compelling because there’s a lot to like about the company.
For example, the operation remains cash-generative, there’s a big pile of the folding stuff on the balance sheet, which offsets borrowings to produce a net cash figure. And the firm is well-established and experienced in its niche, having first listed on the stock market as long ago as 1962.
The company operates across the UK, Ireland, Continental Europe and Asia and is engaged in a process of aiming to diversify its operations, in terms of what it sells through its vending machines. One example of that is the April acquisition of Sempa, which delivers fresh fruit juices and built up a network of outlets in France. Photo-Me aims to replicate Sempa’s success internationally.
In today’s update, the firm said recent trading has been “in line with expectations.” And City analysts following the firm expect revenue to increase by just over 8% in the current trading year to April 2020 with earnings rebounding by around 22% after a dip the year before. The laundry business is making good progress in Europe and Asia but the identification division in the UK remains “challenging.”
Hidden growth potential
The directors reckon the trading weakness is because of delays to Brexit, causing uncertainty and lower consumer activity. On top of that, the UK Government decided to allow photos taken on smart devices and cameras at home to be used for passport photo identification. Nevertheless, excluding the UK, revenue from the rest of the identification business was stable over the past five months, increasing by 0.2%. Overall, the division suffered a revenue decline of 3.8%. So not a total disaster, in my view.
I reckon the division still has the potential to grow even though recent trading has shown weakness. The firm has more than 12,000 photo booths connected to government organisations for the secure upload of photo ID in the UK and Continental Europe. The directors reckon the niche is set to expand “as discussions with governments to deploy this technology progress.” Meanwhile, the Laundry division is a “key driver” of growth with revenue up 23%.
To me, Photo-Me International looks like a well-financed business trading well with some potentially temporary challenges in one area of its business. To overcome that, other divisions are growing and performing well.
And with the shares at just over 85p, the valuation looks attractive to me, with the forward-looking earnings multiple and the dividend yield for the trading year to April 2021 both running near nine.
