Investment Highlights
 

1. Support Services Company, Restore PLC is providing support to its customers from different organisations through its product like eView, to  maximize the data held as digital records.
 

2. The company, with its automated processes and back-office workflows, helps its clients to become cost-effective and agile.

3. The company, through its services such as Document Management, Digital Mailroom, Digital Workflows and Research Data Capture helps companies into digital transformation with auditability, compliance and security.

4. The group has reported strong revenue growth with a decent operational performance for the period.

5. Restore delivered good results in FY2019 period, with stable earnings growth, and robust free cash flow generation.

6. The company provide its services to multiple industries, which include Defence and Military,  Government and Local Authorities, Energy, Legal, and NHS and Healthcare, etc.

7. The group is confident towards its business model and management team to tackle the uncertain times created due to coronavirus pandemic.

8. The share price is currently trading near its 52-week low, which makes an excellent opportunity to buy this value stock.
 

Restore PLC (LON: RST)

Restore PLC is the United Kingdom-headquartered support services company. It caters to offices and workplaces in the private and public sectors with two business divisions - Document Management and Relocation. The offering of the company includes - Restore Records Management (document storage, cloud and media storage), Restore Datashred (document shredding), Restore Digital (scanning), Restore Harrow Green (commercial and workplace relocation), Restore Technology (recycling of IT equipment and consumables). The company was listed on FTSE AIM in November 2004 as Mavinwood PLC, which later changed its name to Restore PLC in 2010. Since 2010, the group has focused its services throughout the United Kingdom and made over 30 acquisitions in existing operations and related services, to deepen and broaden the business. Today, the company is operating under the leadership of Charles Bligh, CEO.

In July 2020, the group is expected to announce its half-yearly results for 2020.

Highlights of FY2019 Results

 
(Source: Company Website)

Key Statistics



Strategic Vision for Future Expansion
 

1. Organic Growth: Generate organic growth from the existing and new customers through high retention and cross-selling.

2. Acquisitions: Inorganic growth through acquisition and horizontal integration for driving cost-efficiencies since most of its market is fragmented and holds substantial opportunities. 

3. Margin Growth: Bringing real estate rationalization and better integration of acquired businesses to reduce cost and improve margins.
 

(Source: Annual Report)

Key Resources and Capabilities for Competitive Advantage
 

1. Large scale, tight control over cost, market knowledge and the UK focused approach.

2. The Long-term relationship with customers.

3. One-stop shop which has nationwide coverage.

4. Substantial technology investment over the years.

5. Robust track record of accretive growth through acquisitions.
 

Market Sector Penetration

Being a market leader and UK offices focused business, RST group has a broad customer base with a diverse range of both public and private clients, as shown in the picture below:


(Source: Company Website)

Operational Highlights of 2019 Reflecting Strong Momentum

Operational:
 

1. The Restore Records Management division has shown net box growth of 1.5 per cent.

2. The robust operating performance of Restore Datashred offset the paper price headwinds.

3. Contract expansion was there under Restore Digital segment.

4. The group had also made four acquisitions.
 

Issuance of Ordinary Shares in 2020
 

1. 116^th April 2020: The RST group announced the issuance of 4 2,142 new ordinary shares at a price 5 pence.

2. 14^th January 2020: The group had announced the issue and allotment of 478,000 new ordinary shares at a price 5 pence each.
 

Top Shareholders

 

Covid-19 and Business Update (21^st April 2020)
 

1. The group showed decent performance in the financial year 2019, with double-digit revenue and profit growth, with net debt reduction to GBP 88.5 million.

2. The outbreak of coronavirus caused disruptions, and the company changed its planning assumptions for the financial year 2020.

3. The group is focused on ensuring the health and safety of its customers and employees and has implemented steps to ensure services and sites remained operational.

4. The company has a robust balance sheet, substantial credit facilities with a revolving credit facility of GBP 160 million and taken multiple steps to reduce cost and preserve cash.

5. The group is focused on protecting itsoperational capability and taking decisions to become well-positioned so that it can bounce back strongly once the situation stabilises.

6. The management team of the company has agreed to take reduced salaries by 20 per cent voluntarily and will not be paying any dividend until the situation gets normal.

7. At present, the group is not able to quantify the impact of the outbreak and imposed lockdown by the government to contain the virus and will be providing further updates on 21^st May 2020 at AGM.
 

Financial Highlights - Decent Growth Trajectory in FY2019 (ended 31 December 2019)


(Source: Annual Report, Company Website)
 

1. For the financial year ending 31^st December 2019, driven bypositive net box growth and decent performance in Harrow Green, the revenue increased by 10 per cent to GBP 215.6 million as against GBP 195.5 million in FY2018.

2. The group’s adjusted EBITDA on a consistent reporting basis increased by 12 per cent to GBP 54 million in FY2019 from GBP 48.2 million in FY2018.

3. The adjusted PBT (profit before tax) on consistent reporting basis increased by 13 per cent to GBP 42.4 million in FY2019 from GBP 37.5 million in the financial year 2018. The group’s statutory PBT on consistent basis stood at  GBP 27.8 million in FY2019 versus GBP 21 million in FY2018, driven by strong growth of revenue and operating profit.

4. The adjusted earnings per share on a consistent reporting basis stood at 27.6 pence in FY2019 versus 25.20 pence in FY2018 with a dividend of 7.2 pence per share for the period.
 

Financial Ratios - Strong Profitability Margins versus Industry Median

 

The reported EBITDA margin, Operating Margin, Pretax margin stood at 23.3 per cent, 14.7 per cent and 12.9 per cent, respectively, for the FY2019 period. All three metrics reported were well above the respective numbers for the peers. On the liquidity front, Restore Plc’s current ratio was higher than the industry median of 1.07, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the Restore Plc’s was 0.46x, which was lower as compared to the industry median of 0.96x.
 

Share Price Performance


Daily Chart as on 21^st April 2020, before the market close (Source: Thomson Reuters)

On April 21, 2020, at the time of writing (before the market close, at 11:12 AM GMT), Restore Plc shares were trading at GBX 367.00, down by 5.90 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 560.00/GBX 325.00.

Bullish Technical Indicators

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further. 14-day RSI is currently hovering in an oversold zone and carry the potential to trigger an upside bump in the stock price.

Valuation Methodology

Method 1: Price/Earnings Approach (NTM)



To compare Restore Plc with its peers, Price/Earnings multiple has been used. The peers are HomeServe Plc (NTM Price/Earnings was 24.55), Johnson Service Group Plc (NTM Price/Earnings was 15.48), Marlowe Plc (NTM Price/Earnings was 14.71) and GYG Plc (NTM Price/Earnings was 12.63). The Average of Price/Earnings (NTM) of the company’s peers was 16.90x (approx.)

Method 2: Price/Cash Flow (NTM) Approach
 


To compare Restore Plc with its peers, Price/Cash Flow multiple has been used. The peers are HomeServe Plc (NTM Price/Cash Flow was 21.65), Inspired Energy Plc (NTM Price/Cash Flow was 14.75), Marlowe Plc (NTM Price/Cash Flow was 14.35), Johnson Service Group Plc (NTM Price/Cash Flow was 11.48) and PayPoint Plc (NTM Price/Cash Flow was 12.29). The Average of Price/Cash Flow (NTM) of the company’s peers was 14.90x (approx.)

Valuation Metrics


(Source: London Stock Exchange)
 
This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that’s driving ROE.

Restore Plc Vs FTSE AIM 100 Index (1 Year)


(Source: Thomson Reuters)

In the last year, Restore Plc share price has delivered 14.85 per cent returns as compared to negative 22.71 per cent returns of FTSE-AIM 100 index, which shows that the stock has outperformed the index during the last year.

Total Return 5 Years


(Source: Thomson Reuters)

Restore Plc has generated a total return of 67.66 per cent in the last five years versus the total return of FTSE All share of 1.67 per cent for five years period.

Dividend Yield


(Source: Thomson Reuters)

Restore Plc has a dividend yield of 1.85 per cent, which is higher than the sector dividend yield of 1.4 per cent but marginally lower than the industry’s dividend yield.

Decent Fundamental Growth Trajectory: FY2019
 

1. The group reported the revenue growth of 10 per cent to GBP 215.6 million in FY2019.

2. The group adjusted profit before tax also surged by 13 per cent to GBP 42.4 million in FY2019.

3. The adjusted earnings per share also increased by 9.5 per cent to 27.6 pence in FY2019.

4. The total dividends for FY2019 stood at 7.2 pence, reflected 20 per cent growth against FY2018.
 

Growth Prospects and Risk Assessment

The group has a clear strategy of growing the business organically and inorganically by leveraging the scale of business and longstanding relationships with clients. Over the medium to long term period, the group seems financially stable to tap opportunities in the fragmented markets in which they operate, to expand the market share. Moreover, the group is holding the position in the United Kingdom as a market leader in business relocation and document management. It also reported double-digit growth in revenue and profit during the financial year 2019, with a significant reduction in net debt (GBP 111.3 million to GBP 88.5 million).

However, in the short-term period, the market environment remains uncertain and volatile because of Covid-19 and its severe impact. The government restrictions have been impacting the activity level across the United Kingdom. In the short-term, the group is focused on providing essential services at its business unites and protecting operational capabilities.

Having said that, the group’s core strength is the recurring nature of their business, especially from storage management which continues to operate without any material impact. Also, it has taken several measures during March-April 2020 for liquidity management including Capital investment freeze, reduction in discretionary costs, postponing activities related to the acquisitions, remuneration cut for board and management and temporary furloughing employees.

The company keeps on launching new platforms and upgrade the old products and services to become one of the market leaders in the support services sector. The company, through its wide-ranging scope, has accelerated growth organically and through acquisitions. The group is exposed to the effects of political and economic risks. Global political uncertainty regarding trade policy also poses a risk for the group, including protectionist measures and regulation or legislation in local markets.

Business Outlook Scenario

The company has shown an increase in financial performance in FY2019. Both the top-line and the bottom-line performance has improved, with improved profitability margins for the period. The group also managed to control its operating expenses effectively for the period. The grouped entered into the financial year 2020 with a strong financial position, a robust business model and good momentum. The group remained confident about its management team and business model to face the uncertainty created due to Covid-19 outbreak. The global economic and political environment continues to be uncertain amid the contagion of Covid-19. Restore’s client portfolio is well-diversified globally, which put them in a position to generate significant market opportunities.

Over the course of 3 years (FY16 - FY19), the company’s revenue surged from GBP 129.4 million in FY16 to GBP 215.6 million in FY19. Compounded annual growth rate (CAGR) stood at 18.55 per cent.

Based on the decent prospects and support from the valuation as done using the above two methods, we have given a “Speculative Buy” recommendation at the current of GBX 367.00 (as on 21^st April 2020, before the market close at 10:24 AM GMT), with lower-double digit upside potential based on 16.90x Price/Earnings (approx.) on FY20E earnings per share (approx.) and 14.90x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.).
 
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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