Metrofile revenue grew per our forecasts at +16% y/y (+3% added via the consolidation of IronTree for the full period and, importantly, +13% of this growth was organic in nature) but EBITDA was slightly lighter than we expected at R345m (FY 22: R325m) as inflationary pressure, the full cost of the prior year’s established go-to-market team was carried and necessary IT upgrades were all carried in these results.
The Group bought back 10m shares, helping HEPS grow +5% y/y to 32.1cps (FY 22: 30.8cps) and the dividend was maintained at 18cps (FY 22: 18cps).
Our Thoughts: Two Large, Near-term Contract Wins Offer Upside
The Group’s MRM South Africa and MRM Middle East both won significant contracts during the period. While the South African one’s timing is hard to know (we have excluded it from our forecasts), the Middle Eastern contract should start generating revenue from the end of FY 24E (included in our forecasts from the start of FY 25E).
Note: These two contracts alone add c.+20% to Group annual revenues for the periods they occur, we cannot understate how significant they (and their timing) are to Metrofile’s next couple of financial years.
Forecast, Valuation and Implied Return: Inexpensive quality
We see Metrofile’s fair value as 423cps (previously: 426cps), implying an EV/EBITDA of 7.4x & a PE of 13.2x (comparing attractively to Iron Mountain’s current EV/EBITDA of 16.1x & PE of 47.8x).
Rolling our fair value forward, we arrive at a 12m TP of 500cps (previously: 496cps), implying an attractive c.65% return (including dividends) from these levels.
Given the fast growth in Digital Services over the period and the significant premium these businesses trade at in public markets, we are increasingly expecting some sort of inflection points in the coming years where Metrofile’s valuation starts to reflect the growing percentage of revenue coming from Digital Services.
Revenue rose +19% y/y to R564m (H1:22 – R474m), driven by a +61% y/y growth in digital services but revenue mix and costs moved against the Group’s margins and saw EBITDA only rise +6% y/y & HEPS lift +1% y/y to 15.0cps (H1:22 – 14.9cps).
Management returned R22.6m to shareholders through share buy-backs (c.6cps) and have declared a dividend of 9cps (H1:23 – 9cps).
We have somewhat lifted our forecast revenue expectations but also tried to factor more sustained inflationary pressures and higher interest rates into the Group’s forecast period.
Our Thoughts: Bottom-line Growth Coming…
While the current period was somewhat disappointing from a margin perspective (we did guide for margin pressure in H1:23 in our previous note), we do expect revenue growth to start to drop to the bottom-line in H2:23E.
The new go-to-market sales team in MRM South Africa, IronTree’s continuing (if not accelerating) growth, Metrofile VYSION’s success in the enterprise space, & a growing MRM Middle East (mostly digital services) are all likely to grow in contribution to the Group over time and, thus, the Group’s growth profile should start to move towards these businesses with their digital tailwinds.
Forecast, Valuation and Implied Return: Relatively Cheap
We see Metrofile’s fair value as 426cps (previously: 404cps), or c.37% higher than its current share price.
Importantly, our fair value implies an EV/EBITDA of 7.6x & a PE of 13.8x, which compares attractively to Iron Mountain’s current EV/EBITDA of 14.5x & PE of 27.4x.
Rolling our fair value forward, we arrive at a 12m TP of 496cps (previously: 473cps), implying an attractive c.60% return (including dividends) from these levels.
Revenue rose +5% y/y, EBITDA +1.0% y/y and HEPS slipped to 30.7cps (FY 21: 31.8cps) as floods, disruptions, inflationary pressures and longer customer lead times combined to make for a weaker H2:22 than we had expected.
Despite this, cash generation was strong (R324m EBITDA converted into R327m of cash flow), debt levels are comfortable, and management hiked the dividend by +20%.
Finally, management have asserted that share buy-backs will be initiated, which should be quite accretive at this share price.
Our Thoughts: Core remains strong, digital growing quickly
The tumultuous environment obscured the progress made in retaining the Group’s core (net boxes grew +2.8% y/y) & growing its digital services (now making up 21% of Group revenue and grew +35% y/y).
On the latter point, digital services are growing even quicker than reported because scanning revenues were in fact down -9% over this period; IronTree was slightly ahead of targets, & DataStor & eTracker (Metrofile Vysion) grew +40% y/y in this period.
Annexure A shows the Group’s digital strategy (past, present & future) and it is very much worth studying as roadmap.
Forecast, Valuation and Implied Return: Undemanding multiples
We see Metrofile’s fair value as 404cps (previously: 405cps), or c.24% higher than its current share price. Higher interest rates and our inclusion of IFRS 16 leases into net debt (taking c.34cps of fair value out of SOTP) were the major headwinds that kept our fair value flat over this period.
Importantly, our fair value implies an EV/EBITDA of 7.5x & a PE of 12.7x, which compares attractively to Iron Mountain’s EV/EBITDA of 14.2x & PE of 37.7x.
Given the large (c.21% of revenue) and growing (+35% y/y growth) digital revenue in Metrofile, our implied multiples appear even more attractive when you consider them relative to listed digital peers in this space (average EV/EBITDA of 20.2x & average PE of 44.4x).
Rolling our fair value forward, we arrive at a 12m TP of 473cps (previously: 472cps), implying an attractive +46% return (including dividends) from these levels.
Metrofile’s H1:22 period saw domestic riots & elections, the implementation of the POPIA, Kenyan regulatory pressures, COVID lockdowns & supply chains disruptions.
The Group’s revenue rose +4% y/y (driven by the Middle East and Digital Services), though margin pressure lowered Operating Profit -2% y/y.
Strong cash generation allowed the Group to degear further (despite acquiring IronTree during this period) & the combination of lower finance charges & a lower effective tax rate (attributable to the Middle East) saw HEPS grow +1% y/y.
Implementing a new dividend policy, management has hiked the interim dividend by +29% y/y.
Our Thoughts: H2:22 Recovery + Digital is Growing
Many of the headwinds in H1:22 should abate during H2:22E, thus we expect some upside in the coming full FY 22E results.
Already in Q2 management saw box volumes in South Africa recovering while H2:22E should also see a full six month’s consolidation from IronTree (it was only consolidated for a single month in H1:22).
Perhaps not obvious at first glance, but Digital Services now contributes 20% of the Group’s revenues. We are extremely bullish on developments in this space and expect Digital Services to be a growing vector in future results.
Forecast, Valuation and Implied Return: Margin of Safety
We see Metrofile’s fair value as 405cps (previously: 428cps), or c.20% higher than its current share price.
Importantly, our fair value of 405cps for Metrofile implies an EV/EBITDA of 7.1x & a PE of 12.7x, which compares attractively to Iron Mountain’s EV/EBITDA of 14.6x & PE of 31.1x.
In fact, when compared to Iron Mountain, Metrofile has the same-or-better returns & significantly less gearing.
Rolling the 405cps fair value forward, we arrive at a 12m TP of 472cps (previously: 497cps). This implies an attractive +41% return (including dividends) from these levels.
70%-stake for an upfront cash payment of c.R49m & a top-up payment of up to R12.3m if Irontree hits EBITDA of R18.7m for its FY 22E (February) financial year (likely), &
30% to be acquired at a price based on a FY 24E revenue target of R100m (i.e. allowing integration of the business in the Group) but limited to the maximum (total) acquisition price of R140m.
Depending on how you view Irontree’s min/max purchase price:
It is on an FY 22E EV/EBITDA of c.4.3x ~ 7.5x,
An FY 22E Price Earnings of c.6.7x ~ 11.7x, &
Appears attractive against our implied DCF of the business.
Our Thoughts: Good Start on Digital Strategy
Irontree is highly cash generative with c.15,000 SME customers & earns c.90% of its revenue from digital backup & hosting services (i.e. recurring revenue) with c.10% of its revenue from digital, security & compliance services.
The business has grown revenue by c.+15% y/y CAGR over the last 5 years &, assuming this remains unchanged, the Group’s FY 24E revenue could be c.R69m (i.e. missing the R100m). Therefore, the R100m revenue target implies confidence that Irontree’s addition to Metrofile’s group will raise its growth rate (i.e. synergies).
This is a good first step in Metrofile’s Digital Strategy with a well-thought-out, reasonably-priced & comfortably-sized acquisition that should fit neatly into the Group and bolster both the Group and the acquired business’s growth rates (assumptions in note body).
Forecast, Valuation and Implied Return: Updated
Irontree lifts Metrofile’s FY 22E & FY 23E HEPS to 35.6cps (previously 35.1cps) and 40.2cps (previously 39.5cps) and adds c.+6% to our fair value of 428cps (previously 405cps).
Rolling this fair value forward, we lift our 12m TP to 497cps (previously 468cps) implying a 57% return from these levels.
Business Overview: Dominant domestic document storage player
Metrofile has the largest share of the South African document storage market with a strong pan-African & Middle Eastern footprint enjoying good margins and attractive growth.
The Group has a long operating history with high returns, strong cash flows and a defendable track record against comparatives.
Document Storage + Digital Strategy = Evolving business
While the global paper sector appears to be slowly contracting by between -1.0~-2.0% y/y, the document storage market is still growing with net box growth and rising, compounding revenues.
Intuitively, while a piece of paper may only generate revenue once when sold, it appears to generate an average of between 14-to-15 years’ worth of revenue when it goes into storage.
Globally & domestically, strong regulatory tailwinds continue to drive the need for secure physical storage while economic activity continues to generate paper that requires this storage.
Metrofile is using this platform, its cash flows & position of trust with clients to grow its services and digital offerings.
Indeed—and likely key to Metrofile’s long-term growth rate—the Group’s management has specifically crafted a digital strategy that, while hard to quantify or value, may offer some exciting prospects as it is executed.
Forecast, Valuation and Implied Return: Undervalued share
Using a segmentally-driven DCF to build our SOTPs fair value, we see Metrofile shares as worth c.405cps on an implied EV/EBITDA of 6.8x (this is a 48% discount to Iron Mountain’s EV/EBITDA).
Rolling this fair value forward at our CoE, we arrive at a 12m TP of 468cps generating a large 52% implied return.
Given recent takeover approaches that were frustrated by COVID-19, adding a 15~30% control premium to our fair value implies a fair takeover price of between 465cps to 526cps. For this reason, we view MFL shares as holding a long-dated embedded takeover option, however hard to predict or value.