David Holding thinks Photo-Me has entered bargain basement territory.
The last couple of years have been depressing ones for Photo-Me International (LSE: PHTM) and its shareholders. So is there any way back from here?
Photo-Me makes photographic equipment and mini-labs and makes, sells, services and operates its own coin-operated photobooths, copiers, printers and children's rides.
And it hasn’t been a happy ride to be on. Last summer, one of the main institutional shareholders called for an EGM as it was unhappy at the (then…) proposed sale of the vending division -- which has always been highly cash generative. The fund also called for the heads of the Chairman and CEO -- and got its three wishes granted in the weeks that followed, though the former boss retains 19% of the company he built up over 17 years.
The chart for the last couple of years certainly isn’t a pretty snapshot either. The shares were over nine times their current level just over two and a half years ago. Clearly, overall market sentiment has exacerbated an already deteriorating situation.
So what?
So what you might say? It’s today’s price and value that matter in the investing stakes so does PHTM offer value at a bargain basement price or is it a falling knife with further to plunge?
At 14p, Photo-Me is currently valued at £50.4m. The company’s final results for the year to 30 April 2008 showed revenue on continuing businesses down 1.5% at £209.7m on which PHTM made a pre-tax loss £1.9m ignoring exceptional items etc. The new Chairman saw these results as “deeply unsatisfactory.” I’m sure the long-suffering shareholders did too.
But it’s all about the future under the new Chairman, CEO and board. And it seems they have a lot to work with to create value for shareholders from the current level.
Is there any value left?
First of all, the price-to-sales ratio at 0.24 looks tempting for bargain hunters. A return to anything approaching the kind of profitability PHTM achieved two or three years ago, before the rot set in, would make a joke of today’s valuation. The company made a profit of £34.5m in 04-05 and £28.5m in 05-06, and these figures were achieved on a turnover not wildly dissimilar to last year's.
Also, the balance sheet doesn’t make quite as depressing reading as one might expect given the share price weakness; net tangible assets total around £50m, though this could deteriorate if trading doesn’t improve.
Then there’s the inevitable ongoing “strategic review” being conducted by the new man at the top. He’s looking for “stability” in the current year and is also looking for a reduction in net debt via decreases in capital expenditure, taxation, dividends and cancelling share buy-backs. The broker clearly thinks he can turn things around, forecasting pre-tax profits of £1.3m for the current year rising to £4.8m next.
One of the Directors seems to agree having bought shares recently at 13p. The company has also rid itself of a small USA vending business this week.
Whilst not completely safe, at today’s price, the shares look firmly in bargain basement territory to me.
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