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Metrofile Holdings – FY 24 Results – Disappointing but could be the Bottom

Share Code: MFL – Market Cap: R1.1bn – PE: 15.1x – DY: 5.6%

FY 24 Results: Weaker than expected

Metrofile’s revenue rose only +1% with MRM South Africa’s revenue slipping -3% hurt the Group as delayed decisions by customers and slower product sales and revenues from digital more than offset good box pricing.
The MRM Middle East’s EBITDA margin fell as management had to fend off two large new entrants in the market, MRM South Africa’s scanning margins saw pressure from internal issues and continued weakness in Kenya saw management impair goodwill by R53.5m in this segment
Management has decided to wind up Tidy Files (successfully executed after year-end), triggering a R19.9m one-off in FY 24.
All these one-offs combined to negatively hit EPS by c.12.6cps with EPS coming in at 3.9cps (FY 23: 32.1cps) but—excluding the one-offs—the Group’s Normalized HEPS declined to 20.0cps (FY 23: 32.1cps).
Despite these troubles, the Group’s cash generation remained strong (R287m of EBITDA generated R309m of cash from operations), degearing continues (Net Debt dropped -9% to R537m) and the Group declared a full-year dividend of 14cps.

Our Thoughts: New CEO, revised forecasts

The Group has a new CEO with a solid background, the current CFO steps into MRM South Africa’s turnaround as MD of this major segment, & the Board will announce a new CFO shortly.
We have been relatively ruthless by lowering some long-term assumptions and downgrading FY 25E HEPS by c.-17% (but still see it recovering from FY 24’s trough earnings).

Forecast, Valuation & Implied Return: Lower discount rate

We see Metrofile’s fair value as 347cps (previously: 390cps), implying an EV/EBITDA of 7.0x & a PE of 21.1x; this compares attractive to Iron Mountain’s current multiples (see below):

The change in our fair value is less of a downgrade than our cut in earnings as the large drop in South Africa’s sovereign bond yields over the period has propped up our segmentally-driven DCF fair values (i.e. future cash flows are now worth somewhat more).
Rolling our fair value forward, we arrive at a total return 12m TP of 403cps (previously: 456cps), implying a high c.61% return (including dividends) from these levels.

Share Code: MFL – Market Cap: R1.1bn – PE: 8.5x – DY: 6.3%

H1:24 Results: Headwinds constrained revenues & hurt margins

Metrofile Holdings reported a much tougher H1:24 period than we had expected with several headwinds either constraining revenue growth or negatively impacting short-term margins.
Revenue grew +2% but this below inflationary pressures (labour costs increased +11%) and EBITDA decreased 4%.
Higher interest rates increased the financing burden and saw HEPS for H1:24 decline 13% to 13.0cps (H1:23 – 15.0cps).
In line with earnings, the dividend was lowered to 7cps (H1:23 – 9cps) and management bought back 1.5m shares in the market at a c.297cps VWAP.
The Group’s cash flow remained exceptionally strong (R160m of EBITDA converted into R143m of operating cash flow) and debt levels remained reasonable.

Our Thoughts: Strong recurring underpin to revenues & cash flows

Physical and digital subscription revenues make up 62% of Metrofile’s revenue, underpinning a strong base of recurring cash generation from which management continues to build out the Group’s digital strategy, this period being no exception.
On this digital strategy, IronTree, cloud & digital service revenue continue growing & we expect their contribution to Group revenue mix to grow (see Figures 2, 3 & 4 in this report).

Forecast, Valuation and Implied Return: Undervalued

We see Metrofile’s fair value as 390cps (previously: 423cps), implying an EV/EBITDA of 7.0x & a PE of 12.9x (comparing attractively to Iron Mountain’s current EV/EBITDA of 18.9x & PE of 129x).
Rolling our fair value forward, we arrive at a total return 12m TP of 456cps (previously: 500cps), implying a high c.78% return (including dividends) from these levels.
Our short-term forecasts were optimistic & have been lowered. Yet the fundamentals remain in place for Metrofile to defend its core business while it keeps investing in faster-growing, long-tail digital services businesses that are steadily transforming the Group. See Table 8 in the report (or below) for global comparisons.

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.