Restore – following a shredding it is now recovering

Mark Watson-Mitchell reckons Restore will see a second-half bounce, before doing much better next year.

After some impressive growth having been recorded by this group – the five years from 2015 to 2019 saw revenues increase from £91.9m to £215.6m, while pre-tax profits quadrupled from £6.10m to £24.80m – the first six months of this year have knocked it sideways. Understandably the cause was the dreaded virus.

The period to end-June saw sales fall 16% to £89.5m while the adjusted pre-tax profit was 44% lower at £10.0m.

Disappointing for the management of Restore (LON:RST), the 2004 AIM-listed company that provides services to offices and workplaces in the private and public sectors.

Despite the Covid-19 hit interims, I consider that this group will see a second-half bounce-back in the remaining chunk of 2020, before doing very much better next year.

The group’s two main divisions are document management and relocation.

Its Restore Document Management side, which has some 5,800 customers and is the number 2 in its marketplace, covers documents storage on both the cloud and in physical facilities. It also handles document shredding and document scanning.

It operates from 55 locations across the UK, in mostly leasehold premises, the majority of which are large modern industrial units. However, it also uses other very cost-effective sites such as former stone mines and aircraft hangars.

Its shredding and recycling services in this division has 12 shredding centres across the UK, 450 staff and a fleet of over 200 collection and mobile shredding vehicles. It is number 2 in its sector and boasts over 14,500 customers ranging from SME companies to much larger public corporations.

The Restore Digital side, also in this division, has 360 staff operating within its eight UK scanning bureaus. Its offer ranges from one-off projects up to covering digital mailrooms, receiving hard copy mail and redistributing in electronic format or even lifting data from hard copy and pushing it out through cloud hosted database management.

The second division is Restore Relocation. It has eight UK branches, 360 staff and 115 vehicles. It provides international move support for individuals or whole office relocations. It also offers long-term storage and furniture and office asset recycling. Once relocated the group can also introduce housekeeping or business process development services through other group companies.

Also in this division is Restore Technology, which operates on four UK sites and generates its revenues from software imaging, physical installation, asset tagging, software and hardware upgrading.

The cross-selling and marketing opportunities across the whole group are really quite significant. It deals with around 85% of the FTSE 100 companies, 85% of the top 50 UK accountancy companies, some 95% of the top 100 legal practises, 80% of the UK’s National Health Trusts and over 65% of the English, Welsh and Scottish local authorities.

On a revenue breakdown records management and storage provides 49%, other record management services 26%, relocation 17% and IT and technology 8% of group sales. It operates with fairly high recurring revenue streams.

There are 125.65m shares in issue. The larger holders include Octopus Investments (11.1%), Canaccord Genuity Wealth Management (7.6%), Invesco (Oppenheimer Funds) (New York) (6.2%), Polar Capital (4.5%), Franklin Templeton Investments (4.4%), Slater Investments (4.3%), Royal London Asset Management (3.9%), Charles Stanley (3.9%), and M&G Investments (3.1%).

Last year, in early November, the group announced its trading update for the nine months to end-September. I would hope that it will do so again this year and give us some stronger indication of just how the full 2020 year will trade out.

Broker estimates for current-year turnover suggest a 13% easing in revenue to £187m, while pre-tax profits could well fall just 3.5% to £23.9m. Earnings of only 15p would put the shares on a mega 22.4-times p/e ratio.

However, the next year could see revenues of £210m and pre-tax profits of £33.7m, worth 21p per share in earnings and covering a 6p dividend. That would lower the p/e ratio to only 16 times, which is much more acceptable.

Capitalised at £421m, with its shares at 335p, I consider that Restore is very capable of bouncing back in sales and profits and scaling up to much higher ground over the next few years.

I now put the shares out on a 420p target price.