ME Group (MEGP)   162.6p

Gain to date: 1.8%

In February 2024 we highlighted the underappreciated competitive strengths of instant-service equipment designer, maker and operator ME Group (MEGP).

The company, formerly known as Photo-Me International, has built a dominant market share in its chosen segments giving it unrivaled geographical diversification which provides growth opportunities not reflected in the rating of the shares.

The firm’s unique business model and inherent strengths allow it to generate high returns on the capital it deploys and consistent cash flow.

WHAT HAS HAPPENED SINCE WE SAID TO BUY?

Results for the half year to the end of April showed continued business momentum with revenue up 8.6% on a constant currency basis and pre-tax profit climbing 13.6%.

The Wash.Me laundry machine business was once again the fastest-growing area with underlying revenue up 19.6% (17.4% on a currency-adjusted basis) as the number of Revolution machines in operation grew 18% on the previous year.

The group continues to roll out its machines in high-footfall locations such as supermarkets and petrol forecourts, and its pipeline suggests it will deploy a record number of machines this financial year.

Despite underlying strength in the business which Berenberg believes puts the company on track to beat full year profit estimates, investors took a less rosy view with the shares dropping 5% on the day of the results.

Foreign currency headwinds were the culprit, cutting reported group revenue growth almost in half to 4.6% with the brunt of the impact felt in the photobooth business which saw growth slip to 2.3% from 7.4% excluding foreign exchange movements.

During the first half the Japanese yen fell 15% against sterling and the euro slipped around 2%.

The board gave a positive outlook saying it expected the business to deliver another record year of profit, in line with market expectations.

WHAT SHOULD INVESTORS DO NOW?

The long-term investment case remains intact, while the business looks in good shape to deliver another record year of profitability in 2024 which implies a pre-tax profit of £73.6 million based on consensus forecasts.

With a dividend yield close to 5% and high single-digit profit growth, the shares remain attractively valued relative to the growth potential and quality of the business. 

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