Share Code: MFL – Market Cap: R1.3bn – PE: 9.3x – DY: 6.0%
FY 23 Results: Double-digit Organic Growth
- 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.
Share Code: MFL – Market Cap.: R1.5bn – PE: 10.5x – DY: 4.5%
H1:22 Results: Tough Period
- 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.
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.