This year, I have been bullish about the outlook for the vending machine operator Photo-Me (LSE: PHTM). So far in 2022, its share price has soared 63%. That means it is 38% higher over the past 12 months.
After the big jump in price however, could buying these shares still offer value for my portfolio?
Why the Photo-Me share price is booming
Back in February, a bid to take the company private at 75p per share looked to me like it would act as a cap on short-term price movement. Even though the chief executive led the bid, it failed. That caught my attention. If the boss and major shareholder was willing to pay 75p per share of his own money, I figured he must think the company was worth that — if not more.
In March, I therefore saw an opportunity for my portfolio. As I wrote at the time, “I like the fact that the shares yield over 4%, with potential for large growth simply by the dividend getting back to its old level.”
The reason for that is the vending machine is highly cash generative. It has low wage costs and often little competition. Photo-Me also has pricing power in its photo booth business – if you need a set of passport photos urgently, you will probably get them even if it costs a pound more than it did last year.
That helps explain why in its interim results this month, the company announced that post-tax profit for the first half was up 75% compared to the same period last year. It restored its interim dividend, at 2.6p per share. On top of that, it announced a special dividend of 6.5p per share.
Strong prospects
I think there could be more good news to come that might boost the Photo-Me share price further. The business moat enjoyed by the industry leader, with its estate of thousands of machines, is sizeable and could be very lucrative.
There are still risks though. Lockdowns continue in some markets, which could hurt sales. The company also noted that recession and high inflation could hurt consumer spending. While people may still need to wash their clothes, discretionary spending such as buying fruit juice might fall. So revenues and profits could fall in some parts of the Photo-Me business.
But I think the results highlight the resilience and cash generation potential of the company’s business model. As a potential shareholder, that looks attractive to me.
Even ignoring the special dividend, the ordinary dividend yield at today’s Photo-Me share price is 5.2%. That is higher than when I wrote the bullish words above in March. Yet the interim dividend is still 30% lower than it was before the pandemic. I see scope for it to rise further as the company continues to throw off excess cash.
I do not think it is too late for me to add Photo-Me to my portfolio — and would consider doing so. In fact, the shares do not go ex-dividend for the special payout until 11 August. So if I bought in the next couple of weeks, I would still be in line to receive both the interim and special dividend.
