So, after weeks of no real movements in the portfolio, Photo-Me International drops out by virtue of dropping over 15% from its initial purchase price. To be quite truthful, I had been thinking of ditching this before as the share price was drifting down prior to a trading update (not a good sign), but on 23 May the share tanked 5% in one day leaving me with no other option.
Annoyingly enough the share managed to recover some 8p before the close, meaning that I seem to have picked the bottom correctly. But I much like ex-girlfriends, one must resist the temptation to look at them after they have gone. In truth, it’s been a poor performance in the share price since the start of the year with a steady decline.
It should be said there were a few reasons why Photo-Me makes a good investment which I remember at the time of purchasing. It is an incredibly stable business – photo booths have been around for decades, and whilst technology has really caught up with them they have found ways to keep themselves relevant; the company is also diversifying into other areas to prevent reliance on this. Furthermore the company is a proven performer, consistently profitable and also has a good cash pile.
At a market valuation of around £600m Photo-Me is a steady enough performer and seems to have a few barriers in place. Additionally most of their revenues are also earned outside of the UK in European markets with slightly different characteristics.
I suppose then, I started to get cold feet, that the price paid was a bit too high. In fact, I am starting to think that the targeted growth may be difficult here for a few reasons:
- Emergence of technology: In the past, the photo booth was a convenient way to get a passport-type photo. Nowadays many government agencies are allowing self-taken photos. Whilst mobile phone cameras in their initial iterations were not good enough, recent ones such as the Huawei P20 Pro with its inbuilt processing produces images as good as (or even better) than that of the machines. All one needs is a white background.
In all likelihood this trend seems set to continue, and in a few years even entry model mobile phones will feature excellent photo quality. At the moment this risk is mitigated by many Photo-Me machines offering connections to government agencies, but this I feel is not a competitive advantage, for instance in future governments might decide to operate their own apps where users can upload their photo.
- Market Saturation: Photo-Me machines are everywhere nowadays. Most major train stations (and even minor train stations) have one, and shopping centres have multiple machines. The reason is simple, they offer money to the landlord and require no maintenance. But there will be a natural limit on the number of sites that can justify a machine.
- Technology: New apps for mobile phone cameras seem to have killed the leisure market for photo booths. There seems to be no real justification for using one otherwise, aside from official means. The price charged at these booths is expensive (typically £6) and many don’t accept card payments.
- Expansion into washing machines: I feel this is ill-suited to the UK where the launderette has died out because people have already got their own washing machine. Finding sites for these machines is difficult as they take up more space, are rather ugly and would require more frequent maintenance (filling with powder).
The customer proposition seems odd as well. Unless the machines are in very convenient locations it means someone lugging their washing along with them, and seeing as many of these units are destined for outside someone will have to wait while their washing is done. The prices charged for a wash seems high and there are no perceived benefits in the quality of wash. The units seem to have little protection for adverse usage – for instance a customer simply leaving their washing there for a few hours while they run other errands (in the meantime the machine becomes unavailable to make any money).
Obviously this could work better in other countries where using a launderette is more commonplace, but even here the trends will be for washing machine ownership to increase. For sure charging £4 for a service that can only accommodate 1 customer an hour and requires more attention has much less margin in it than taking and printing a photo for £6.
At the time of writing, Photo-Me was trading on a P/E of about 15 which I feel is a bit too much to pay; there are no real obvious paths to growth and I am not a believer in the laundromat format – short of delivering something real improvement to the customer (either on price or quality) I think growth here is limited. These type of businesses have only flourished in certain countries and usually owner operated for good reasons.
That said, the fundamentals of the company are good, there appears to be good management on costs, the cash position is good and there is a progressive dividend. I think it looks a little overpriced, but I would be interested at lower levels.
Pure Passive Investor. Always looking for ways to make money (but not myself) work harder.