Time to store up?
Between 2013 and 2017 Metrofile’s share traded in a broad range, between 400c and 550c, before it fell sharply in early 2018. At the time of writing the share was at about 150c.
There has been a concomitant fall in the rating, and the earnings multiple now stands at six times rolling 12-month headline earnings, compared with 18 times at the peak five years ago.
The question for investors is whether the fall in the share price provides a buying opportunity. A few key ratios need to be considered.
What is strikingly obvious is
the substantial increase in the debt-to-equity ratio in 20172018. Net debt rose from R185m to marginally above R600m, and the deterioration in return on assets managed dropped to 14% (it was 22% at end financial 2017) on both a fall in the operating margin and asset turn.
The annual report and subsequent discussions with management have confirmed that the debt incurred was part of a geographic and technological realignment of the company.
About R260m was spent on acquiring G4S Secure Data Solutions in Kenya — providing an immediate presence in East
Africa and setting up a platform for further forays in the region.
Another R65m was spent on capital expenditure to facilitate organic growth.
Metrofile also acquired the remaining 30% of Cleardata and 100% of Tidy Files, and established Dexterity Solutions to focus on digital product development in the records and information business.
Metrofile is cognisant of the change that technological developments is bringing to industries — the ones most pertinent being software allied to digitisation.
Management views this as a threat if left unattended, but also a tremendous area of growth. This explains the move to establish Dexterity Solutions.
Another area of growth is presented by the trend by businesses to focus on their core competencies. Partnering with specialists and the outsourcing of nonessential functions are gaining traction.
Metrofile is making solid inroads in this area as it develops services that complement its existing record information management expertise.
Notwithstanding the high level of debt at Metrofile, IM believes the share offers value at current levels, for several reasons.
Metrofile has enjoyed a high cash conversion ratio, and this needs to be seen against the backdrop of incurring debt as an investment in new growth initiatives.
Management indicated at the interims that it expects a better second half.
For one thing, the high tax rate (40% in the first half) will normalise, and full-year headline earnings should come in at about 23c-25c a share. This places the share on a forward earnings multiple of 6 to 6.5.
It is worth mentioning that Metrofile has weathered high debt-to-equity levels before. In 2008 the ratio was twice where it stands today (199%), but by 2013 it was down to 25%, with a marginal increase in shares in issue (+6%).
Headline earnings rose from 14.4c to 25.2c over the period.
A repeat of this should result in buyers at current levels being well rewarded.