Firstly, go have a listen to my chat with Chris Hart on what I am calling 'the retail sales paradox'. Chris has some very interesting points to make about this phenomenon.
Metrofile Holding (MFL) released a positive trading statement yesterday indicating that the Group expects HEPS and EPS for FY 12 to be up between 18% and 21%.
Now Metrofile is essentially a document solutions business offering corporate and enterprise clients with a complete, turnkey service for their documents and sensitive information needs.
This is perhaps explained with an example from a past life of mine: auditing. When I was still doing my articles, one of the audit cycles I specialized in was essentially the computer and ICT environment. A key part of this cycle is the Disaster Recovery Plan (DRP), of which a key aspect is backup procedures.
Anyone who has ever lost data will appreciate how important backups are. Not just that, but a large percentage of businesses actually fail after experiencing a major data loss. Now, best practice of backups is to keep them offsite, as then any physical disaster that befalls the business's premises won't also wipe out the backups.
Almost every single client I audited (which ranged from SMMEs to massive multinationals) use Metrofile to collect their daily, overnight etc backups, along with any other documents that they were forced to keep on hand (for example, for tax and legal purposes) and take them back to store at Metrofile warehouses.
This offered an easy, elegant solution that was scaleable and kept, well, the auditors, SARS and many other parties happy. And, from Metrofile's perspective, it was annuity-income for highly routine, easily manageable and costable work: invoices will always be generated by businesses, backups will keep happening and documents will just keep multiplying with businesses not wanting or auditing letting them keep them onsite.
Basically, Metrofile fills the administrative gap that businesses (especially big business) need doing what these businesses do not want to do.
Now, Metrofile does a lot more than just this and does offer many other bolt-on services and value-add, but the annuity-income of Metrofile's Record Management segment coupled with its relatively low and highly manageable cost-base is really the heart of this business.
And it is this heart of Metrofile that has consistently performed year in and year out... While Metrofile listed during the DotCom bubble, and suffered the downside of that market's crash, it has performed almost without a single tarnish since then.
This latest trading statement is no exception.
But, what of Metrofile's future?
Well, this is where I begin to wonder, as there are two separate problems I see: cloud computing will imply that backups and data are essentially offsite already with increasing virtualisation limiting physical document volumes, and while Metrofile has a strong local presence, it is struggling to gain traction outside of our country.
The first point means that Metrofile's long-term volume growth may be flat, if at all, while the latter point risks the Group's growth trajectory from a local saturated market. If you cannot grow locally as you already dominate the market and your foreign operations are not working, well, you are pretty much an ex-growth business then, aren't you?
Overall, though, Metrofile remains very well managed, quality Dotcom survivor, but one that I really think could pay a more aggressive dividend or, at least, make an acquisition or three to move into parallel markets.
Moving on, Micromega (MMG) put out some very good results yesterday. Let me say upfront that I won't comment on the qualitative concerns that may exist around this business, though they may be real or not.
The Group is a holding company for a number of diverse support service and ICT businesses (ignoring the disposed of automotive business), so allow me a moment to run through the various businesses in MMG's stable...
NOSA is the leading (and arguably only!) provider of health & safety solutions in South Africa. NOSA is really a quality services business with high reputational and scale barriers to entry and, basically, no competitors. It’s revenue streams come from 3 major sources, all which are very defensive in nature:
- Sales of NOSA health, safety and environmental audits (c.20% of revenue that tends to be annual in nature, i.e. annuity-like).
- Sales of NOSA training courses in health, safety and environmental matters (c.60% of revenue with numerous courses, long-standing clients and excellent order books, i.e. most courses NOSA offers are booked out for easily the next year or so).
- Sales of other products (c.20% coming from various technology solutions, products and related sales, e.g. NOSA branding of ‘workmen overalls’).
NOSA’s cost-base is mostly semi-skilled staff, allowing fantastic margin of c.50% on its revenue base. As an ex-Government department, NOSA’s own drafted safety standards (of which is audits and trains clients on) has been exported into numerous countries and basically adopted as their own standards. At this point many of these countries have only adopted these standards, but not enforced them, i.e. leaving a fantastic opportunity for NOSA to export its services into pre-existing (and massive, e.g. China!) markets. Currently, foreign revenues only account for c.0.5% of NOSA’s revenue, as it has been management’s focus to settle the business locally before going abroad. Hence, this is the real long-term blue sky in NOSA.
Turrito Networks is an ICT connectivity and cloud provide.
More pointedly, Turrito has built ‘Cloudware’. Cloudware is simply one of the most exciting, scalable and sellable cloud-computing solution I have come across in the tech space. Now, the complication with cloud computing is really the sales process, as the sales cycles tend to be very long and expensive involving convincing a client to migrate their entire system onto a new one.
On the case of Cloudware, the solution is simply a software layer that can be installed in c.30 minutes and demo’d for an entire network thereafter. The marginal cost of selling Cloudware is basically nothing, as the R&D has been spent, and the software is sold on a per user, per month annuity basis.
In other words, Cloudware has significant blue sky potential.
MECS Africa is a pan-African staff resourcing business to petro-chem and mining markets. MECS Africa is really a staff resourcing business into Africa, providing temporary and permanent placements into the petro-chemical and mining markets in Africa.
So, overall, Micromega is quite a diverse group with some very interesting holdings.
I encourage you to go have a look through the Group's H1:12 results and play around with some valuation techniques of the share. I won't go into details, though, but I will show you where I see the underlying value in the share coming from:
Finally, just in case you are interested, I've made an addition to my portfolio: Calgro M3 (CGR - Keith's Portfolio).
The demand for housing in South Africa is basically infinite, so housing businesses don't have to worry about that. The removal of this variable means that housing businesses just have to manage their ability to supply housing and, as Seakay (SKY) shareholders found out, the very important process of managing cash flows and funding.
Calgro M3 is doing both these activities extremely well.
I had a great breakfast with Calgro M3's management the other morning, I've worked through their rough order book, I've taken into account their latest trading update and it all seems to point to the same conclusion: the 394% rise in Calgro M3's share price looks to be only the beginning...
Yes, that does mean that I am late to the party and I have missed out on a potential 4-bagger. But, I feel much more comfortable with having done the homework on the stock and, unfortunately, that process takes time. Ce la vie.
So, as much as I am now talking my book, Calgro M3 appears deeply discounted against its fair value with very rosy prospects indeed.