Metrofile & Share Buybacks

Earlier this week, defensive, records storage and business support group, Metrofile (MFL), announced a long-awaited start to their share buyback programme. They have just bought back 3.2% of the Group’s shares at an average price of 487cps. The current share is trading at around 470cps.

I got a couple questions on this, so let me work my way through them:

(1) Why is there a buyback after placing shares recently with the MIC (Metrofile’s major BEE shareholder)?

MIC was previously holding just under 35% of Metrofile’s shareholding. By issuing shares to MIC, Metrofile took their shareholding over 35% and triggered a forced offer to minorities. Going this way allowed Metrofile and MIC to make an application to the Takeover Regulation Panel (TRP) to waive the requirements of the forced offer to minorities, which, in turn, meant that MIC could quietly and painlessly breach this 35% threshold.

And, thus, Metrofile could now start to buy back shares in the open market.

Previously, if Metrofile had started buying back shares, it would have meant that MIC would have passively breached the 35% threshold and would then be forced to make an offer to minorities but without being able to get a waiver from the TRP.

At least, via a private placement, TRP waiver, and then starting the buyback, the process was controlled and didn’t trigger any contingent liabilities for MIC.

Make sense?

(2) What effect will this buy back have on Metrofile’s fair value?

The buyback does not change the total value of Metrofile’s Group, just its cash balance and the number of shares in issue. Hence, if Metrofile pays less than fair value for its shares, the cash outflow is less than the uplift in fair value from having less shares to divide the business up by.

This is a fancy way of saying that if share buybacks are well applied, they can add lots of value (with lots of caveats here).

Before the share buyback, I saw Metrofile’s fair value as c.532cps on a DY of 5.6% and a PE of 17.0x.

Because MFL paid less than this fair value for the shares, after the share buyback (and once I annualise its effects), I see Metrofile’s fair value as c.623cps on a DY of 4.8% and PE of 19.9x.

Why the big difference? Well, not just did Metrofile buy its shares back at below fair value, but it did this using low-yielding cash, thus replacing a low yielding asset with a high yield stock. I value Metrofile’s DCF based on a Weighted Average Cost of Capital (WACC), and the application of this cash lifts the amount of debt in the Group, which lowers the WACC, and, thus, lifts the DCF fair value.

Make sense?

(3) How is Metrofile doing?

I spoke with management pre-close, and the Group sounds like it is doing just fine. I am expecting good results out from them in about two or three months’ time.

In conclusion, it’s been a bit complicated for Metrofile to get to the point where it can initiate its share buyback programme, but we have arrived. Thus, you can expect the highly cash generative Group to continue buying back its shares cheaply in the market while it nibbles at new acquisitions (e.g. its recently acquired Tidy File) and keeps lifting its dividend.

All in all, a solid story in a lesser-known stock.

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