Restore ticks the right boxes

Accounting for 44 per cent of group revenue and 70 per cent of operating profit, the core business is records management. On the face of it, it's a rather simple concept – fill a space with boxes. But with a capital-intensive set-up, an understandable reluctance by customers to change suppliers and reliance on efficiencies of scale, there are high barriers to entry. With three-quarters of sales derived from storage charges for physical documents, some 20m boxes in storage produce steadily growing revenue streams. Revenue increased by 26 per cent to £86.5m in 2018 with 3 per cent organic growth. This is despite the introduction of the general data protection regulation (GDPR) causing a short-term spike in destruction and removal rates as customers reviewed their storage criteria. Although GDPR may be an administrative headache for many companies, it represents a boon for Restore, creating long-term demand for professional document management to comply with standards and avoid hefty penalties. Increased awareness surrounding secure destruction of paper records has benefited the Datashred business (where revenue increased by 6 per cent to £41.8m in 2018) which should aid the business’s recovery following significant restructuring.

Restore’s non-core divisions exhibit comparatively slower revenue growth – accounting for 25 per cent of group revenue, the relocation business (workplace relocations and IT asset management) saw 6 per cent growth in 2018. However, in operating closely-related businesses in the UK office services market, the group is able to exploit cross-selling opportunities. Looking to win new contracts to replace the completion of large projects, the scanning business will leverage the records management customer base to fulfil their digitisation requirements. The group has deep penetration in many of its key markets – it increased its customer base in 2018 to include 88 per cent of FTSE 100 companies (from 80 per cent) and 94 of the top 100 legal practices (from 90). As the market leader or number two in four out of five of its business streams, a strong market position enables scale and efficiency.

Given customers' reluctance to change suppliers, the group has built scale through acquisitions and has bought more than 30 companies since 2010. Last year the group made the significant purchase of TNT Business Solutions for £88m (a primary driver of revenue and profit growth) as well as eight smaller bolt-on acquisitions. Recent acquisition activity has centred on records management. The group now sees limited scope for significant further consolidation in this area, but there are opportunities in the fragmented shredding, digitisation and IT recycling markets.

That is not to say momentum in records management will slow. While Restore already serves many public sector clients (including 81 per cent of NHS Trusts and 67 per cent of local authorities in England, Wales and Scotland), the TNT acquisition reflects a major step-change. TNT operates the major pan-governmental records management contract, providing long-term services to major government departments. While almost all private sector entities requiring document storage have outsourced these services, the public sector market remains comparatively immature, offering further growth opportunities.

Reflecting acquisition activity, net debt swelled by 42 per cent to £111.3m last year. With a sizeable leasehold property portfolio, the reclassification of leases under IFRS 16 will see net debt increase by £130m-£155m and pro-forma lease adjusted leverage increase by 1.2 to 1.7 times adjusted cash profits. However, Restore remains highly cash generative, with limited additional spending beyond its relatively high set-up costs. Net cash generated from operations more than doubled to £32.4m in 2018 and the group achieved operating cash conversion of 131 per cent.