Restore underperforms due to digital segment

In July, Restore (RST) issued its second profit warning in two months, along with news that Charles Bligh had stood down as chief executive by “mutual consent”. The share price duly cratered, contributing to a 71 per cent decline over the past 12 months. The records management group has struggled in the face of faltering demand for its bulk digital scanning services, while prices for recycled shredded paper headed south. The group’s interim figures suggest that trading conditions are still far from ideal, so the focus on cost efficiencies has intensified to mitigate the ongoing challenges.

Adjusted profits fell by 28 per cent to £15.1mn, a partial reflection of increased financing costs, while statutory earnings were in negative territory due to a non-cash impairment of £32.5mn on the carrying value of the investment in Restore Datashred. Restore did manage to offset inflationary pressures within the digital and information management division by passing on costs to its clientele and cost savings are being generated through “changes to organisation structures and the property estate”.

The performance of the digital segment – sales down 17 per cent to £25.8mn – was partly attributable to the cyclical nature of bulk document scanning and data capture services, at least in “the current macro environment”. Admittedly, the performance was set against a “strong comparative” in 2022 due to large non-recurring scanning contracts. But the reality is that this corner of the business is vulnerable to budget rationalisation as its customers are also looking to trim costs.

Separately it was announced that Mike Killick will join the business as interim chief financial officer. Above all, the new man, along with interim chief executive, Jamie Hopkins, will need to restore investor confidence in the group’s executive performance. Those doubts are reflected in a lowly forward rating of seven times FactSet consensus earnings. Hold.

Last IC View: Hold, 450p, 28 Jul 2022