September | 2021 | Blue Gem Research

Share Code: MFL – Market Cap: R1.3bn – PE: 11.6x – DY: 4.9%

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.

Share Code: TRL – Market Cap: R323m – PE: 8.3x – DY: 6.2%

FY 21 Results: Sterling results, strong cash flows & good dividend

Trellidor released strong results, reflecting the Group’s healthy recovery with revenue rising +23% y/y, cost-savings, efficiencies & lower finance costs lifting headline earnings by +181% y/y and HEPS doubling (+195% y/y) to 40.8cps (FY 20 – 13.8cps).
Underpinning the results was strong cash generation; management declared a full-year dividend of 21cps (FY 20 – 8cps) putting the share on a juicy 6.2% Dividend Yield.
Management continued to grow the Group’s product range (four new products were successfully launched & a commercial product range expansion is planned in the coming year) while bringing underperforming Main Centre franchisees in-house to great effect (acquired franchises grew revenue +46% like-for-like!), yet the Group also managed to control its overheads and saw a mere +4.3% y/y rise in operating expenses.

Our Thoughts: Bottom-line momentum likely to continue

Given the Group’s tight cost control, the price increases that it will leak into the market and franchisee consolidation & growth uplift that we expect, Trellidor’s EBITDA, operating profits and, ultimate, bottom-line momentum appears likely to continue for FY 22E.
We have raised our expectations of share buy-backs from 1.0% pa to 1.5% pa, especially if the share price remains languishing at its current market price.
All these initiatives imply attractive upside to forward HEPS.

Forecast, Valuation and Implied Return: Undervalued & Yielding

Our DCF Models imply that Trellidor is worth c.548cps (previously: 442cps) on a c.13.5x PE and c.7.1x EV/EBITDA.
Rolling this fair value forward at our CoE, we arrive at a 12m TP of 656cps (previously: 532cps) implying a large 93% return from the current share price (including dividends).
Speaking of dividends, irrespective of fair values, Trellidor shares still trade on an attractive 6.2% Dividend Yield (& Forward DY of > 7%) that looks to be comfortably sustainable.

Blue Gem Research