I love to see and use the products or services of the companies I own. Document management company Metrofile Holdings (MFL) is not a service that I subscribe to directly, but since I have become an investor in this cracking business about a year ago, I have increasingly seen boxes imprinted with their logo creep up in various homes and offices. Boxes is exactly what this company does. They take your documents, which you as a business (say a doctor, a lawyer, an engineering company or a financial institution) are legally bound to store for a number of years, put them in boxes, and then store them for you. They own the warehouse, they own the online platform, they own the boxes.
This type of business is incredibly profitable, as it takes time and scale to build warehouses, establish logistics chains and develop online platforms. It has very strong recurring earnings, as it is difficult to change providers, once established and businesses need to file their documents in good as well as bad years.
MFL is trading at a relatively rich PE of 16. However, if we remove the once off costs associated with a replacement of the CEO, this PE drops to 14.5. If we further consider that group has a dividend payout policy of 1.25-1.5 and management has temporarily increased this to 1.1 to increase gearing in the business, then the value at current share prices, becomes more apparent. The current dividend yield is 6.1%, essentially the same return as money in the bank, if the different tax treatment of dividends and interest are considered.
The gearing is very low, with long term debt at less than 10% of assets. In fact, management has stated its intention to increase gearing. They are not doing this by means of senseless expansions or acquisitions, but rather by increasing the dividend payout, thereby allowing the shareholder to re-allocate this cash. I think that a moderate increase in the debt is justified, given the low level of risk in MFL’s business model due to the recurring nature of the earnings. The company’s continuous cash flows are recession proof and supported by regulation in many of its jurisdictions. In fact, regulation, something that is abundant in Africa, is one of MFL’s strongest moats, and in my opinion this is unlikely to disappear in the coming decades.
South Africa’s specific regulatory requirements, namely BEE, are well addressed by the anchor shareholder, the MIC – Mineworkers Investment Company. They have recently increased their shareholding to just under 36% by subscribing to an additional 8m MFL shares, re-affirming their commitment to this strategic investment. The total Black shareholding in the business is at 55%.
However, the real growth and future of MFL lies outside RSA, in other African and emerging market economies, where cashflows are in US$, regulation is strict and quality document management services are yet to be stablished. It is with great pleasure that I read in MFL’s results that they operate in locations in Botswana, Mozambique, Nigeria, Zambia, the United Arab Emirates, Qatar and Oman.
Amid these healthy cashflows, solid business fundamentals and African and Middle-Eastern expansions, the group is very positive about its growth prospects. The Management Outlook is that of a group that is confident that it can leverage its infrastructure and location advantages:
“Metrofile anticipates continued growth in the challenging economic and business environments, both locally and on the African continent. The group will continue to seek growth opportunities across all business units, both locally and internationally, in cradle to grave document management solutions. “
This strategy is already being executed, with various acquisitions in Southern Africa and the Middle East growing its strong foothold in these areas.
“At this stage, Metrofile expects to resume its historic earnings growth profile in the forthcoming financial year.”
Rarely, have I read a more confident statement by management. I for one am happy to share in their confidence, and receive boxes full of dividends, while I wait for the growth that is certain to come.