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Buy Restore's well-documented growth

The group is now first or second in each of its main sectors sector following a series of acquisitions
June 29, 2017

While the day-to-day document management and relocation activities of support services group Restore (RST) may sound dull, the financial performance is not. The group has delivered five years of strong growth in both turnover and earnings per share, and in the past year alone these were up 41 per cent and 15 per cent, respectively. Restore is comprised of two divisions; the larger one, document management, accounts for 70 per cent of revenue and 80 per cent of profit and focuses on records management work such as storage and retrieval of documents, as well as secure shredding and recycling. The relocation division focuses on both workplace and technology relocation. In the year to the end of December 2016, the divisions grew adjusted operating profit by 46 per cent and 17 per cent, respectively.

IC TIP: Buy at 430p
Tip style
Income
Risk rating
Low
Timescale
Long Term
Bull points
  • Strong growth record
  • Further acquisition opportunities
  • Leading market positions
  • Defensive businesses
Bear points
  • Integration risk
  • Increasing net debt

While the underlying performance of the two divisions is solid, much of the growth over recent years is due to acquisitions. The most significant of these was PHS Data Solutions, which it bought in August 2016 for a total consideration of £83.1m. The deal makes Restore one of the two main providers of records management, shredding and scanning in the UK. PHS was the third major acquisition made by the group in as many years. It bought Cintas in October 2014, then Wincanton Records Management in December 2015. Since the end of the last financial year it has acquired two UK-based secure shredding companies and an IT recycling company.

 

 

Acquisitions look set to remain a key part of management's strategy for growth, with analysts at N+1 Singer predicting that dealmaking will lead to double-digit earnings growth continuing over the medium term. Importantly, given the level of acquired growth, return on capital employed (ROCE) - a measure of the underlying quality of a company's operations - nudged up to 9.1 per cent last year based on SharePad's lease-adjusted numbers, although ROCE has been higher in the past.

All the recent acquisition activity has, however, led to an increase in net debt, which reached £72.3m at the most recent update, from £60.6m previously, but this fell short of the analysts' forecast level of £80.2m after benefiting from the sale of Wincanton Records Management's Irish assets to the tune of £27.7m. Restore also raised £34.2m from a share issue at 290p during the year, and increased overall borrowing capacity to £97.5m from £80m.

The group's latest trading statement, released in May, was encouraging. Management reported that the records management business was benefiting from the integration of PHS and the resulting increase in scale, while the relocation division's toner cartridge recycling business, ITP, was improving on its lacklustre performance in 2016, when it recorded a loss on lower revenue.

RESTORE (RST)

ORD PRICE:430pMARKET VALUE:£485m
TOUCH:428-431p12-MONTH HIGH:435pLOW: 253p
FORWARD DIVIDEND YIELD:1.3%FORWARD PE RATIO:19
NET ASSET VALUE:135p*NET CASH:48%

Year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20146811.110.92.4
20159215.413.93.2
201612922.216.44.0
2017**17129.320.04.9
2018**17832.222.25.4
% change+4+10+11+10

Normal market size: 2,000

Market makers: 6

Beta: 0.13

*Includes intangible assets of £190m, or 169p a share

**N+1 Singer forecasts, adjusted PTP and EPS figures