In a world of virtual reality headsets and generative artificial intelligence (AI), it is easy to forget that low-tech activities can still be very lucrative. Certain companies tend to get overlooked, therefore, by investors in search of trendier options.
One example that cropped up in the Investors’ Chronicle in February was 4imprint (FOUR), a £1.4bn branded merchandise business. The group, which operates in the unfashionable world of lanyards and keyrings, seems to have dodged the advertising downturn that is tormenting tech-focused rivals, growing organic sales by 45 per cent in 2022 and tripling its profits. Shares have more than doubled since last summer as a result.
Me Group International (MEGP), formerly known as Photo-Me, falls into a similar category. The company makes and installs photo booths, out-of-home washing machines and fruit juicers, as well as the children’s rides that live in shopping centres. While innovative, there’s something rather old-fashioned about its products, which prompted us to put it on a ‘sell’ in 2019.
We upgraded Me Group to a ‘hold’ in 2021, though, and since then its shares have more than doubled, profit forecasts have stepped up a gear, and the group has been promoted into the FTSE 250.
What’s been going on?
There’s a lot to like about Me Group’s business model. Its 43,800 machines are scattered across train stations, shopping centres and car parks, but they are owned and maintained by the group itself. Third-party site owners then receive a cut of the machine turnover, a fixed fee, or a combination of the two.
Capital expenditure is high at around 14 per cent of sales, and the group spends a sizeable chunk of money on research and development every year. However, its approach has resulted in excellent margins, high returns and plenty of cash generation.
The group’s operating margin sits at about 20 per cent, return on capital employed hovers at a similar level, and free cash flow conversion is comfortably above 90 per cent, meaning shareholders receive generous dividends. After all, the machines have a relatively fixed cost base and, once installed, sit there gathering cash.
Canaccord Genuity analyst James Wood added that the group has been "very aggressive" on price since Covid, which has not dented demand and has further enhanced margins.
Photograph exposure
Me Group started life as a coin-operated photo booth company in 1946, and listed on the London Stock Exchange in 1962. Today, about 60 per cent of group sales still come from photo booths, which have proved to be a steady source of cash and are cheap to maintain (Capex has historically accounted for about 6 per cent of sales, according to analysts at Berenberg).
The division now has an enviable market share of 30 per cent across continental Europe and beyond, and has longstanding relationships with site owners: 90 per cent of its contracts were renewed in the 2022 financial year. These relationships are a useful moat against businesses trying to break into the market, and provide good earnings visibility.
There's a glaring threat to the business, though: smartphones. The UK now accepts selfies for official ID images, and all of Me Group’s core markets accept photos taken outside of booths. There is a risk, therefore, that Photo.Me will be rendered redundant.
So far, however, the signs are positive. Growth had started to stagnate in recent years, but photo booth activity increased across all territories in the first half of 2023, particularly in Europe and Asia, and revenue grew by 25 per cent year on year.
Anti-spoofing patents could prove essential to its continued success. Spoofing is when two photos of similar-looking people are merged into one image, meaning that biometric security cannot distinguish between the “spoofed” photo and each individual. As deep fake images become more prevalent, this could become an increasingly urgent problem for governments around the world, and could prove lucrative for the company and its biometric technology.
Cleaning up
Me Group’s key source of growth comes from somewhere far less futuristic – washing machines. The company operates 4,800 machines across Europe, China and Japan and the division is extremely profitable, with an Ebitda margin of 47 per cent.
This doesn’t give the full picture, as washing machines are significantly more capital-intensive than photo booths, and depreciate more quickly. Nevertheless, there’s still a lot to like. Wash.Me sales were up 36 per cent in the first half of 2023 and the group is in expansion mode. The division installed an average of 70 machines per month in 2022 and is targeting 80-90 units per month in 2023.
Berenberg forecasts assume a 19 per cent revenue compound annual growth rate between 2022 and 2025 – more than twice the pace of the Photo.Me division – and for Ebitda margins to remain steady at 45 per cent.
Decent price
It is very difficult to know how to value Me Group as there are no exact comparators. Analysts at Canaccord Genuity have had a good go, breaking its peer group into “concessions/construction”, “infrastructure/services” and “retail”. Based on the broker’s enterprise value/Ebitda calculations – which are useful, as EV takes into Me Group's cash position – it looks cheap.
We remain on the fence about Me Group, and are waiting to see what happens to its photo division as the post-pandemic travel rebound loses momentum, and the consumer crunch continues. However, its recent performance is a useful reminder that unusual companies shouldn't be dismissed out of hand.
