With a few years of lethargic earnings, the once blue-chip Metrofile has been trying institutional investors’ patience.
Management painted a picture of recovery in late 2023 into 2024. That again faltered — and the recently released interim results to December 2024 look dire.
The evolution of the document storage business from storing paper in boxes towards a digital migration was under way, management trumpeted. Again, it’s missed its beat.
In the last IM review of the small cap in October 2024, IM warned it was “once bitten twice shy” on Metrofile and would prefer to await interim and financial 2025 results. At 230c IM saw no compelling reason, yet, to own Metrofile.
Fast-forward to the present day and IM’s call was correct, with interim results once again disappointing the market. In a dismal trading update on February 19 the the company reported that its earnings for the six months to December would slump between 23% and 46%. In results released on March 3 Metrofile reported headline earnings of 8.1c a share, down 38%. The dividend was also cut by 43% to 4c a share. On the update and subsequent market reaction, Metrofile collapsed to an intraday low of 117c before rallying in thin volume, with an extraordinary one-day trade gain of 22%, to the present price of 160c.
The group is currently holding storage property assets that are becoming less utilised, yet the costs remain
On the mildly positive side, some shine was gained from improved working capital and cash generation, and group net debt declining by 3% to R521m. The debt remains serviceable but is a concern, given the slide in the company’s standing and valuation.
In reviewing the interim results, the core domestic South African business, comprising the management and storage of 11.1-million boxes and associated cloud and digital services, performed admirably. The largest business, MRM South Africa, reported an 11% slip in revenue to R352.4m as the Tidy Files sale brought down revenue. The exit of the problematic asset resulted in a recovery in profits, with MRM South Africa reporting profits ahead by 18% to R108.4m. There were no material contract wins in the period and the digital migration continues at a very slow pace.
The main feature of the period was that, despite modest growth in inbound box storage, document destruction also rose as clients no longer needed archival material. This trend must be noted and watched.
Metrofile needs to accelerate its digital and online transformation to mitigate the erosion of its core physical storage business over time. The group has storage property assets that are becoming less utilised, yet the costs remain. At some stage, consolidation of document warehouses will be necessary to pare costs. This will lead to cost savings and likely property sales, which would ease debt. IM believes this is more of a medium-term scenario, leaving Metrofile somewhat exposed if document destruction accelerates.
On the offshore operations, many years ago Metrofile expanded into Nigeria (exited), Egypt (exited), the Middle East (partly exited) and East Africa. This offshore drive has had mixed results, and at interim results that expansion showed its flaws. Margins were slashed as the company had to compete in a cut-throat Middle East market and some clients switched to lower-cost operators.
From a profit of R5.5m in the prior period, MRM Middle East swung to a loss of R2.2m. Management states the business is viable and aims to bolster its position, especially in the UAE, where possible. Meanwhile, MRM Rest of Africa reported a 10% rise in revenue to R57.8m yet profit declined 64% to R6.7m.
Metrofile acquired Kenyan data business G4S Secure Data Solutions in 2017 for R281m, but the unit has been lacklustre. Acquired with debt, the division has consistently failed to be a reliable performer despite the inherent potential of the fast-growing region. Management continues to highlight the Kenyan operation as part of a holistic package of services it can offer to Africa-wide banking partners.
But IM questions whether — given the debt pile associated with the perpetually underperforming business — a sale of the asset, along with debt reduction and an exit from the Middle East, would allow Metrofile to bolster its balance sheet and focus on its core domestic business?
Metrofile’s prospects for the second half were a mixed bag. MRM South Africa was expected to continue its turnaround, with Africa and the Middle East remaining challenging. The “build of the digital strategy and platform” continues — it must, or Metrofile risks becoming irrelevant in the longer term, but much of the market has seemingly lost patience with the company, as the share price slide confirms.
At an earnings multiple of 9.7, Metrofile is hardly compelling with seemingly no material recovery for a year. At best, a set of flat year-on-year headline earnings to 16.5c a share can be estimated.
IM retains its stance and sees no rush, yet, to invest in Metrofile.
