November | 2021 | Blue Gem Research

Share Code: REN – Market Cap.: R3.8bn – PE: -89.0x – DY 0.0%

News: Large Reserve Upgrade & Upsizing of Phase Two

Sproule has published an updated reserve statement on Renergen, revealing large upgrades to the Group’s gas reserves.
For example, +428% and +610% was added to the amount of methane & helium in 1P. Similar upsides came through in 2P & 3P.
While Phase One remains mostly the same, this has resulted in us making the following key changes to our Phase Two assumptions:
- Lifting our LNG production from 300tons/day to 720tons/day with a target of c.2.5% yield of helium, &
- Boosting our capex to R12.2bn with 30% of being raised as equity (the balance being debt & prepaid tokens).

Our Thoughts & Spot Prices: Updated & Refined

We have used this opportunity to update spot prices, exchanges rates and interest rates across the model.
Likewise, we have tried to understand management’s expectations for LNG and helium basket pricing and, although we feel that some of their views are conservative, we have tried to align our model with these views.

Valuation and Implied Return: Dividend Discount Model Added

Our Sum-of-the-Parts for Renergen sees the share’s fair value as c.5,747cps and, on basic assumptions, implies an FY 30E Price Earnings of c.6.1x with a Dividend Yield of c.15.6%.
Upon maturity, management intends paying most profits out as dividends. Therefore, we have taken our valuation a step further and attempted a crude Dividend Discount Model (DDM).
Our DDM assumptions arrive at a fair value of 6,412cps for REN minority shareholders (after DWT). This is more or less in line with our SOTP model & adds conviction that REN shares are likely to be worth mid-R50/share to mid-R60/share, or certainly above their current 3,065cps share price, despite Phase Two dilution.

Share Code: MFL – Market Cap: R1.3bn – PE: 10.0x – DY: 3.8%

News: Acquisition of Irontree Internet Services CC

Metrofile has conditionally acquired Irontree Internet Services for a minimum of R80m & a maximum of R140m in cash:
- 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.

Blue Gem Research