Metrofile Holdings – Initiation of Coverage – Boxing Clever

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.