Gunning for a French Revolution

Arsene Wenger

Given it is the last trading day of the month today I have decided to do the weekly update of the Scores after the close so they should be updated by tomorrow morning. This will allow me to have month end data and prices to update the Mechanical Scores Portfolio, so look out for an update on that next week.

So today I have decided to write up one of the stocks which made it into the Mechanical Portfolio although my first inclination and probably yours will be huh. But on further investigation and reflection I have actually come to like the idea of this one.

I chose the above cryptic title as It features a long standing executive who could be considered to be the Arsène Wenger of the corporate world in the UK. For non football fans (or Soccer if you are in the US) Mr Wenger has, since 1996, been the manager of Arsenal football club who play in the English Premier League. In this case I say this executive is similar in so far as he is French and he has been involved with this Company since 1994 with mixed results too. Strangely he also looks remarkably similar to Mr Wenger - I wonder could they be related?

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Serge Crasnianski

Any way joking aside if you are not familiar with Mr Crasnianski you can read more about him by clicking his image above.
The company he has been involved with is Photo-Me (PHTM) which is why I said at the start you would probably go huh?
So having dealt with the Gunners and the French bit this is where the revolution bit comes in. No not another bit of gratuitous music (oh go on then here's some Beatles). No it is their new business Revolution which is a 24/7 outdoor self-service launderette. What's that another eh - I know but bear with me.

These automated launderette's are equipped with 8kg and 18kg washing machines, built-in hypoallergenic washing liquid pump and a vented dryer. Not only is this machine outdoor and available 24/7 but also very economic: £4 for 8kg wash, £8 for 18kg wash and only from £1 for a dry. You can use the 8kg machine for regular loads or choose instead the 18kg machine to wash all your weekly laundry at once or heavy loads such as duvets, throws, curtains and pillows. Apparently it can also text you with a notification that your washing is nearly finished so you can get back to collect it.

You can see  Mr. Crasnianski in an interview below and hear him talking about the business which I got from what looks like a useful resources called Proactive Investors and Stock Tube. As an investor I like to hear him talking about a one year pay back on these as well as their company having no debt or debtors as their customers all pay up front!

In addition the Chairman in last years annual report pointed out the following:

"It is also part of our strategy to be financially independent
as far as we can be and to concentrate on increasing
our returns to shareholders. Our cash flow strength has
therefore enabled us to finance from our own resources
the development and deployment of Revolution, the
expansion of our photo booth estate as well as substantially
increasing dividend payments over the last three years.
We aim to continue to do this."

Furthermore in addition to the 500 or so laundry units they had at the last year end (April 2014) they are targeting having 2000 by the end of this calendar year (2015). On this in their report and accounts they said:

"As with photo booths, the machines are very cash generative and to date, the average EBIT margin on a laundry unit has
exceeded 50%. The achievement of the roll out targets in the short and medium term therefore represents an opportunity for a very significant increase in Group profitability and returns to shareholders."

So this looks like an interesting new concept that they are roiling out to utilise the cash flow from the rest of their business. This seems to be on a more stable footing now as the photo labs part has been run down due to digital technology, but it seems that there remains a demand for Photo booths for passports and a new ID card planned in Japan which he talks about in the interview.

In terms of the shares they do look a bit expensive on the basic PE of around 18x for the year to April 2016, but this would come down to around 16x if you adjust for the 12% or so of the market cap that they have in cash. It also means that their earnings yield looks more reasonable at around 7 to 8% and they are expected to yield over 4% next year too having committed to raising this years dividend by 30%. In addition to this they have paid special dividends in the last couple of years of 3p and 2p so if they cannot find acquisitions or decent investments for their cash then they have said they will consider more specials too.

However, I note in an interview with the CFO (a French lady Françoise Coutaz-Replan) that they are also currently trialling automated car washes at a few European supermarkets to see if they are viable as they do require more in the way of capital expenditure than the revolutions. So I guess if these stack up in terms of ROCE then it sounds like that could be another more substantive use of their cash flow and cash balance maybe. I also note that having lowered their manufacturing costs that they are trying to leverage the Photo Booth estate with some Phiippe Starck designer booths, which are higher margin, printable 3D figurines and expansion in China and other emerging markets with photo booths facilitated by their new lower manufacturing costs.

So I like the balance sheet, the business characteristics, high margins of 20% and ROCE of 33% and the fact that they have found a new venture to grow and invest their cash flow into which seems to be making even higher returns which together with generous dividends appeals to me. Added to which Mr Crasnianski knows the business well and still holds over 21% so his interests should be aligned with other shareholders, hence the shareholder friendly dividend approach.

Why mention it now? Well as I say it comes up on the CIS with a Score of 95 and in fact made it into the Mechanical Portfolio, which is what prompted me to look at it more closely despite my initial scepticism. In addition they have final results coming up in the next few weeks which could act as a catalyst for the shares if they deliver a compelling update on the roll out of the revolution and may be progress on car washes or another special dividend instead?

This might then afford a decent trading opportunity if they can break out of their recent sideways trading range to the upside which might suggest a 160p to 180p short term target perhaps? On the downside I see that it dived to 120p with the market in October, so in similar circumstances or if the results disappoint then I suggest it could have a similar degree of downside which would then take it down to a fairer / more attractive looking ex cash multiple of around 14x. So may be not one to rush out and buy but perhaps one to put on your watch list and see how the next figures come out in the wash -  Vive le revolution!