Signs of a silver lining in the cloud

DThe key is its positioning for large government contracts

ocument storage and digital solutions business Metrofile has for many years been classed as a small-cap blue chip due to its consistent — if somewhat underwhelming — performances.

Earnings growth was mostly annuity based on storing wads of paper for corporates — which led to great cash generation, solid earnings growth and fat dividends.

Under the guidance of major shareholder Sabvest Capital and CEO Pfungwa Serima, as well as seasoned CFO and former corporate financier Shivan Mansingh, Metrofile has spent the past three years evolving away from the old analogue method of storing documents towards a broader digital offering. This involves scanning, business services and cloud-based products. The acquisition of cloud service business IronTree in October 2021 was the start of this process.

In truth, Metrofile had an excellent market standing with a solid blue-chip client base in SA, East Africa and parts of the Middle East. But unless it evolved with new technologies its business would simply stagnate.

This evolution has come at a cost as investment in new services and people has yet to fully reflect in the profit line. Digital margins also tend to be lower than traditional paper systems. But this could free up some of Metrofile’s large R600m property portfolio for sale to either downplay debt or fund further growth.

As part of this reinvention, loss-making divisions and noncore assets were sold. Costs were also trimmed without tampering too much with the core annuity of storing documents.

What Metrofile aims to achieve is to offer new digital services to its existing and new clients to enhance and augment its traditional offering. This should capture new revenue streams and allow for higher growth than what has traditionally been seen.

As a small-cap stock with a market value of R1.3bn, Metrofile is little followed by the mainstream market and has tight liquidity.

There was a dash of excitement in 2019/2020 when a takeover approach was made from a US private equity firm. Metrofile surged towards the 330c a share cash offer — but then Covid got in the way and the deal withered away.

The share price has been range bound since April 2021, trading in a narrow band between 290c and 350c. Sabvest Capital has also bought more shares and Metrofile itself has set aside R50m to re-purchase its own (of which R22m has been purchased to date).

Recent interim results to December 2022 were slap bang in line with forecasts of reasonable revenue growth. But earnings were flat as investment spending hampered profitability.

The share price hardly reacted to the interim results.

In discussions with management recently, there was guidance on a better second half as the benefits of investment, new initiatives and restructuring start to translate into earnings growth. The headline earnings base for financial 2022 was 30.7c a share. For financial 2023, IM forecasts modest growth of 12% to 34.5c a share alongside the usual healthy dividend.

The key to Metrofile is its positioning for large government contracts. These have been outstanding for some time and could, if they materialise, be a “game changer”. IM is more cautious, as in an election cycle government departments may simply delay projects despite their importance for the local economy.

But IM understands new corporate contracts have been won and there remains potential for international growth — especially in Metrofile’s Middle East operations.

The East African operations, expensively acquired in 2017 for R281m, have not yet delivered on their promise — though there was a decent uptick at the interim stage where revenue rose 17% and operating profit increased 32% to R13m. The returns, however, remain suboptimal and the region needs to carry its weight, which management hopes will be achieved via the launch of digital services.

Metrofile is evolving. The revenue contribution and profitability of the old annuity secure storage business is ticking lower as digital services and products and solutions rise. At present there’s a profit mismatch, which is why earnings are somewhat stagnant. But as new digital initiatives gain maturity, management believes profitability will follow.

At 290c, IM maintains its 400c target and issues a HOLD recommendation.

There is little to get the pulse racing now at Metrofile — but the promise of better opportunities is backed by a sound balance sheet and superior management.

Metrofile is worth considering as year-end results to June start to hit.

That may lead to some renewed market interest.