Time to store up?

Financial Mail - Investors Monthly - - Front Page - Nigel Dunn

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.

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