File this one away for a rainy day

IM last wrote about Metrofile in November 2019 when the share price was 220c. That was after a difficult results year, but the price had perked up given the cautionary released in early September 2019 after the results. FY2019 results were dire. Headline earnings declined 29% to 20.5c a share and the dividend was halved to 10c as Metrofile preserved cash to focus on de-leveraging the balance sheet, lumbered with R588m of debt. Much of this debt had been taken on from the acquisition in 2017 of the G4S document management business in Kenya.

The share price before the financial 2019 results hit a low of 130c, a far cry from the 500c the stock had been trading at in prior years.

On the cautionary the stock rallied to the early 200c level where IM said a materially higher offer could be forthcoming and recovery prospects further supported the price.

The September 2019 cautionary led to a 330c a share all cash offer from US private equity firm Housatonic Partners in early December 2019. Metrofile’s shares climbed and even hit 300c in January 2020.

All seemed to be going well. Then in late March Covid-19 hit, stock markets tumbled, and business travel and borders closed. Housatonic in late April put the buy-out deal on ice and wanted to see how the stock traded during Covid.

Metrofile slumped to 201c midyear despite interim results showing management’s steps to restructure the operations, improve cash flow and cut debt. In first half 2020 headline earnings rose 26% to 12.9c a share and a dividend of 6c a share was paid. Debt refinance had improved the tax position and overall debt fell 3%.

Punters smelt the deal was off and the stock languished. But IM saw differently, with the benefits of restructure and a renewed focus on cost reduction and margin improvement.

IM did not believe Housatonic would walk away — not after courting Metrofile for years and undertaking an extensive due diligence. Before the financial 2020 results, market intelligence suggested Metrofile would report solid results and that there was new interest from another party.

In FY2020 the stock rose 21% in headline earnings to 24.8c a share and a 7c a share final dividend was paid. Debt further reduced 11% to R524m.

Overall, the key metrics of debt reduction, strong cash

generation, margin enhancement and dividends all heralded a Metrofile that has used Covid to sharpen its operational attitude. Talk of Housatonic’s interest — coupled to whispers of interest from a potential rival bidder — has perked up the stock.

With a more refined business model, the Metrofile of October 2020 is in a far better operating and financial position than it was in September 2019. IM warrants, given the potential on the re-engineering undertaken — and what is to come in operational efficiencies — the original 330c bid undervalues Metrofile. In short, Metrofile is no longer a mess.

Surely an element of pricing needs to be considered to persuade shareholders as well as majority shareholders Sabvest Capital and the Mineworkers Investment Company to part with Metrofile?

What is that price? Is it 400c? Is it 450c? What IM believes, deal or no deal, Metrofile at 261c has significant recovery prospects.

Investors will need to consider where could they get the same level of return and dividend flow. Management has sharply improved the business and aims to take Metrofile back to the solid, annuity type business it was of old.

IM maintains its BUY on Metrofile with a buyout offer presenting a fair price underpin.