ME Group International (MEGP) 159.7p

Market Cap: £575.4 million

Instant-service equipment designer, maker and operator ME Group International (MEGP) is a compelling investment opportunity.

A dominant market share and increasing product and geographic diversification provide growth drivers which are not reflected in the valuation.

The shares trade on 11.8 times consensus EPS (earnings per share) forecasts for the year to 30 October 2024 and 10.9 times for 2025 which fails to reflect the quality of the business and the growth opportunity.

The company’s business model is unique with inherent strengths allowing it to generate high returns on capital and consistent cash flow.

This in turn provides potential for supplemental growth through acquisitions which are not factored into analysts’ earnings forecasts.

UNDERAPPRECIATED COMPETITIVE STRENGTHS

ME operates more than 44,000 unattended vending machines across 19 countries providing unmatched global scale and operational efficiencies.

Less obvious is the advantage provided by the company’s long-term concession relationships with site owners. Not only does this tie in customers, it means ME can deploy new technologies quickly through existing relationships.

In 2023, the company launched new partnerships in the UK with retailers Morrisons and the Co-op which allowed the company to rapidly expand its Revolution launderette business.

Operating under the Wash.ME segment, the company plans to install between 80 and 90 Revolution machines per month with a focus on France and the UK, although the global opportunity is significant.

ME provides site owners with easy-to-use equipment on long-term contracts in retail parks and other high-footfall locations. For site owners, the machines provide incremental revenue with minimal effort while also increasing the attractiveness of a site.

Site-holders include supermarkets, shopping malls, public transport hubs, petrol forecourts and public administration buildings. ME shares a percentage of the revenue generated with a site owner and deploys engineers to service the vending units.

Increasingly, the estate is being digitalised which means machines can be upgraded and maintained without the need for an engineer to visit a site.

WHAT IS THE COMPANY’S STRATEGY?

Key areas of focus for the future are increasing the density and utilisation of existing vending machines as well as entering news territories and growing the number of customer relationships.  

Laundry is a big part of the strategy, and after growing sales by 34% in 2023 the segment represents 28% of overall sales compared with 22% in 2022. Analysts at Berenberg estimate the Wash.ME segment could grow to 36% of group sales by 2026.

The business generates a high return on sales with an EBITDA (earnings before interest, tax, depreciation, and amortisation) margin of 48% compared with 35% group average.

Although the Photo.ME business is more mature than laundry it remains robust, and management does not foresee a drop-off in demand in the medium or long term.

Demand is helped by the continued introduction of new legislation such as the compulsory replacement of old pink driving licenses in France with new photo ID licences and the My Number campaign in Japan.

ME secures its dominance as much as possible by developing agreements with administrations and regulatory bodies. Over two-thirds of the photobooth market is based on a requirement for official photos such as driving licenses, passports and ID photos.

The company has developed its next-generation photobooth which offers new functionalities and an enhanced user experience. These include Mobile-to-Print, user personalisation and photo-filters.

Over the next year the group aims to install 3,000 next-generation machines (around 10% of the photobooth estate) and 8,000 by the end of 2025.

ATTRACTIVE ENTRY POINT

The team at Berenberg raised its 2024 profit forecast by 2% to 3% after the full-year results (22 February) based on the evolution of ME’s higher margin and faster-growing Wash.ME division.

Notwithstanding the run-up in the shares following the results, they still lag the FTSE 250 index over the last six months which Berenberg argues is unwarranted given the firm’s strong operating performance.

The analysts estimate the shares trade on a 2025 EV to EBIT (enterprise value to earnings before interest and tax) ratio of just 5.4 times which offers an attractive entry point.

Shares believes ME Group shares look attractive given the momentum in the business and the growth opportunity. 

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