Metrofile – Potential 3rd-Party Offer

Below is an extract from the Alpha Prime Small & Mid Cap Fund’s investor letter, published 4 November 2019:

“In September Metrofile issued a cautionary over itself as it was engaging in discussions with a third-party for the potential acquisition and delisting of the entire share capital of the Group. This cautionary is still in effect at the date of writing this.

Despite a wobble and an own-goal in recent years, Metrofile is a high-quality, document storage business with strong cash flows and offers a dominant position in the South African market to any acquiror.

Assuming this takeover happens, what price could we expect?

Iron Mountain Inc. is the world’s largest document storage business, and, despite some differences, it does give us a good yardstick to measure the potential value embedded in Metrofile.

Iron Mountain’s Enterprise Value-to-EBITDA (‘EV/EBITDA’) is currently 11.2x and its 10-year historical average EV/EBITDA is 11.7x. Metrofile should attract a reasonable discount to this as it is smaller and sitting in an Emerging Market (ironically, sometimes EM asset attract premiums due to better growth potential!). That said, if we assume a nearly 30% discount to Iron Mountain’s EV/EBITDA, we arrive at reasonable EV/EBITDA of 8.0x for Metrofile.

Using Metrofile’s last reported EBITDA of R271m and multiplying it by 8.0x, we arrive at an Enterprise Value of R2.2bn. If we then chop out the Group’s last reported Net Debt of R558m, we arrive at an equity fair value for Metrofile of R1.58bn.

Importantly, this translates into a fair value for Metrofile of c.350cps (but it has also not assumed any EBITDA growth in the period nor any control premium; both are theoretically plausible).

Given that the MFL share is currently trading at 210cps, we are comfortable holding this stock. Not just is it cheaply valued but this corporate action may unlock material upside relatively quickly for us.

The only thing we prefer to generating a good return is doing so quickly.”


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