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2023 stock pick: ME Group is a resilient, high quality business

Photo booth and laundry operator ME Group International (MGEP), formerly known as Photo-Me International, had an exceptional 2022. The shares rose 71%, boosted by a stronger than expected recovery from the pandemic.
The shares look in good shape to sustain their momentum as ME continues to drive sales and profits, something which is not reflected in the current market valuation.
The stock trades on a lowly 2023 earnings multiple while the cash generative nature of the business underpins a generous yield. This means that even mid-single-digit profit growth offers the potential for double-digit shareholder returns as ME is rerated.
The resilience and quality of the business is underpinned by strong customer relationships and long-term contracts with infrastructure owners, local authorities and government agencies. This often goes underappreciated and is reflected in the high returns achieved on invested capital of around 30% and strong free cash flows which represent 10% of sales.
The growth strategy is centred around investing in the next generation of photo booths (65% of sales), continuing the expansion of the laundry operations (27% of sales) and growing the food vending equipment business (7% of sales).
The contributions from laundry and food are expected to contribute a larger proportion of the pie in future, creating a more balanced business.
At the half year stage Revolution laundry units in operation grew by 15.9% to 4,360 units while the roll-out of pizza vending machines (pizzas in under four minutes) increased to 20 per month. ME is also pushing an expansion of fresh fruit juice machines in Japan.
The company has strong pricing power as demonstrated by the 33% increase in prices at photo booths put through in the second quarter without any noticeable impact on volumes.
ME has successfully navigated the challenge from smart phones through various marketing initiatives, machine maintenance and removing unprofitable machines.
This can be seen in the average revenue per machine and number of visits which are 22% and 58% higher respectively than before the pandemic.
A partnership with the UK passport office which allows digitally secure uploads from the booths directly onto the government’s servers avoids verification delays associated with selfies.
The company is also introducing entertainment functions and social media sharing to photo booths to attract younger people. Greater diversification of revenues should continue to drive sales while increased site density should drive yield per unit and feed through into higher profit.
Important information:
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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