Should I buy the glitch and pile into this 7%-yielding small-cap?

The share price of Photo-Me International (LSE: PHTM) is up around 5% as I write on this morning’s release of full-year results. However, a plunge during May due to a profit warning means that even after today’s rise the stock still trades around 40% below its January peak. 

If trading is improving, this glitch in performance and share-price collapse could mean that we are being presented with a decent opportunity to buy the firm’s shares at a better price. Let’s dig deeper. Maybe I should buy the glitch and pile into this 7%-yielding small-cap right now.

Money collection machines

Photo-Me operates, sells and maintains instant-service vending equipment for the consumer market. The firm has around 48,000 vending units in operation such as photobooths, integrated biometric identification solutions, unattended laundry services, kiosks for high-quality digital printing, children’s rides, amusement machines and business service equipment. 

The firm’s tactics lead to most of the equipment being placed in prime locations that have high footfall such as supermarkets, shopping malls and public transport venues. The business model involves paying site owners commission based on the machines’ turnover and Photo-Me operates and maintains the equipment. Operations span 18 countries across continental Europe, the UK, Ireland, Asia and the rest of the world.

Trouble in Japan and emerging fast growth

The trading update released at the end of May — which did the damage to the share price — told us that extra investment in the Japanese subsidiary, due to restructuring, had led to a reduced outlook for profits for the trading year to 30 April 2019. Trading in Japan has been disappointing due to fierce competition and slower-than-expected take-up of a voluntary government ID card programme. All this led the directors to anticipate that underlying profit before tax would likely come in at a similar level as the year to April 2018, which the firm reported on today. That’s an outcome that falls below previous market expectations.

However, today’s figures are good, with revenue at constant currency rates almost 6% higher than the previous year and diluted earnings per share up more than 14%. The directors pushed up the full-year dividend by 20%, which I see as a big vote of confidence in the outlook. I think the firm is optimistic that its reorganisation in the Japanese division will pay off down the road. Meanwhile, all the other divisions and geographies are trading well and the firm said it is experiencing “continued revenue growth in all of Photo-Me’s territories, apart from Japan.”

16% of revenue came from the higher-margin laundry business. I think that’s exciting because the revenue from the laundry division grew a whopping 69% in the period. Chief executive Serge Crasnianski said in the report that he expects revenue from Laundry to contribute an “increasingly dominant share to Group profits as we capitalise on the significant expansion opportunities in our markets.”  I think Photo-Me’s modest two-digit forward price-to-earnings rating, and a forward dividend yield in excess of 7%, make the stock well worth your time researching the investment opportunity further.