Photo-Me International PLC

Photo-Me International PLC (LON: PHTM) is a FTSE All-Share listed entity that produces and sells instant-service vending equipment across 18 countries.

Rationale for Valuation – HOLD at GBX 66.00

• Economic Recovery: Britain’s gross domestic product grew by 0.4% in August 2021, strengthening hopes of economic recovery with progressive roll-out of COVID-19 vaccines.
• Solid Fundamentals: PHTM reported a significant growth in revenue, profit, and cash generation during H1 FY21, and carried the growth momentum in Q3 FY21 as well.
• Financial Guidance: FY21’s profit before tax is expected to be between £25 million to £30 million before exceptional items (FY20: £21 million to £24 million before exceptional items).
• Technical Indicator: From the technical standpoint, 20-day EMA (GBX 64.70) trading below the current market price, suggesting a bullish price momentum in the stock.
• Better Liquidity Profile: In H1 FY21, quick ratio and current ratio were higher than the industry median of 1.02x and 1.41x, respective.

Key Risks

• Macroeconomic Uncertainties: The consumer confidence is sliding with fuel crisis, rising cost of living and expected increase in interest rates by the Bank of England.
• Covid-19 Led Disruption: The disrupted supply chain and change in demand patterns due to the COVID-19 crisis can further impact the revenue and profitability.

Trading Update (as on 2 August 2021)

• Improved Trading: PHTM reported a promising recovery in H1 FY21 and subsequently, the Group’s trading in Q3 FY21 was better than anticipated.
• Growth Prospects: The strong recovery in photobooth activity, particularly in Continental Europe, fuelled the growth.
• Revenue Guidance: FY21’s revenue is expected to be around £210 million (FY20: £200 million).

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative)

Conclusion

PHTM has witnessed a promising return to pre-COVID business conditions. It has also completed a multi-country restructuring programme and expects to return to a cash positive position in the short-to-medium term. Moreover, ID photos are considered as a sustainable market, and the Company has an established network to capitalize on the market opportunities. PHTM has also attained a great success in Revolution laundry machines and building a new brand name, ME Group, to strengthen relationship with B2B partners and consumers. The stock made a 52-week low and high of GBX 79.60 and GBX 41.65, respectively.

Based on decent growth prospects, and support from the valuation as done using the above method, we have given a “HOLD” stance on Photo-Me International at the closing market price of GBX 66.00 (as on 19 October 2021), while we look forward to taking fresh position once the macroeconomic turbulence subsides.

i3 Energy PLC

i3 Energy (LON: I3E) is a FTSE AIM-Share listed oil and gas entity that has a growing production base in Canada's most prolific hydrocarbon region.

Investment Rationale – SPECULATIVE BUY at GBX 12.43

• Oil Price Boost: The ongoing supply crunch, rising coal and natural gas prices, dip in US Dollar index, and demand recovery with lockdown easing shall continue to support oil prices growth.
• Outlook: The Company demonstrated a transformation growth in H1 FY21, and it now has a full cycle E&P portfolio to grow production and sustain value creation.
• Technical Indicator: From a technical standpoint, the momentum oscillator RSI (~45.34) is around the oversold zone, while the stock price is hovering close to the lower Bollinger Band.
• Valuation Multiples: On a forward 12-month basis – EV/Sales and Price/Earnings metrics are quite undervalued against the median of the Energy sector, while the Company has higher Dividend Yield.

Key Risks

• Principal Risks: Prevailing volatility in commodity prices, fluctuating exchange rates, and operation difficulties.
• Incorrect Evaluation: Incorrect interpretation of subsurface data can lead to inaccurate estimate for production and reserves.
• Macroeconomic Uncertainties: Weak industrial date, global shortage of semiconductors, supply constraints, tightening of monetary policy can hamper early enthusiasm about demand.

Financial Highlights (for the six months ended 31 May 2021, as on 27 September 2021)

 (Source: Company Website)

• Dividend Declaration: I3E announced an interim dividend of 0.2 pence per share, which is payable on 29 October 2021.
• Financial Growth: The Group reported a significant top-line growth as revenue, net operating income, and cash from operations for H1 FY21 stood at £26.5 million, £12.5 million, and £12.5 million, respectively.
• Operational Highlight: It sustained production above 9,000 boepd (Barrels of oil equivalent per day) and acquired Acquired around 230 boepd of Wapiti production.

One Year Share Price Chart

 (Data Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: EV/Sales Approach (FY21) (Illustrative)

Conclusion 

I3E delivered strategic upsizing in core areas, capital deployment and operational excellence. For the remainder of FY21, it plans to conduct operations safely and ensure dividend distribution of up to 30% of free cash flow.

However, it is a penny stock that is exposed to significant volatilities and investors should gauge their risk-return profile before entering this stock. Notwithstanding, the acquisition of Cenovus has already expanded the production and considerably added future cash flow potential. Therefore, it is well-positioned to create incremental value for its shareholders. The stock made a 52-week High and Low of GBX 16.80 and GBX 3.80, respectively.

Based on the recent commercial partnerships, outstanding top-line growth, capital boost with equity placing, and support from the valuation conducted above, we have given a “SPECULATIVE BUY” recommendation on i3 Energy PLC at the closing price of GBX 12.43 (as on 19 October 2021), with lower double-digit upside potential based on 2.16x EV/NTM Sales (approx.) on FY21E Sales (approx.).

*All forecasted figures and Industry Information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*The reference data in this report has been partly sourced from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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