Restore PLC (LON: RST) – Experiencing a Stable Business Demand with Strong Liquidity

Restore PLC is a FTSE AIM 100 index listed Company, which provides document management and relocation services to offices and workplaces in the private and public sectors. 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 the name to Restore PLC in 2010. Since 2010, the Group is providing services throughout the United Kingdom and made over 30 acquisitions in existing space and related services, to deepen and broaden the business.

In July 2020, the Company is expected to announce the half-yearly results for FY20.  

 
(Source: Company Website)

Key Fundamental Statistics



Segment Analysis

The Company organizes the operations in two principal segments - Document Management and Relocation. The vast majority of business operations are focused within the United Kingdom.

  
(Source: Company Website)


 (Source: Presentation, Company Website)

Recent Developments

10 June 2020: The RST Group had issued and allotted 33,077 equity shares at 5 pence each, following the share options scheme, to be admitted on AIM from 16 June 2020. After the admission, the issued share capital comprised of 124,972,953 equity shares.

Operational Highlights of FY19

The robust operating performance of Restore Datashred division offset the paper price headwinds. Moreover, the Company made four acquisition in FY19, which underpins the potential for future growth. The Group also won long-term contract expansion under Restore Digital segment. Under the Restore Records Management division, the key indicator is an annual net box growth, which increased by 1.5% in FY19.


(Source: Presentation, Company Website)

Top Shareholders Statistics
 
 

Update on Trading Performance Prior to AGM (21^st May 2020)

The Group is focused on ensuring the health and safety of the employees and customers. The Company has implemented 'COVID Secure' guidelines throughout the business units. The demand trends and key performance for the month of April and May remained positive. The trading activities in April were stabilised, and the majority of operational sites remained open to support business continuity. The storage revenue remained the largest business, and Records Management business remained reliable and solid during the period. RST has taken multiple steps to reduce variable costs and discretionary costs. Based on the growing customer demand, the Company has started bringing back the furloughed employees. The cash generation remained strong for the period as expected by the management. Based on the different operating scenarios modelled, the Group is expected to be profitable with strong liquidity and robust financial position for FY2020 ending 31^st December 2020.

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


 (Source: Annual Report, Company Website)

For the financial year ending 31st December 2019, driven by positive net box growth and decent performance in Harrow Green, the revenue increased by 10 per cent to £215.6 million (FY2018: £195.5 million). The Group’s adjusted EBITDA on a consistent reporting basis increased by 12 per cent to £54 million in FY2019 (FY2018: £48.2 million), reflecting decent revenue growth. The operating profit stood at £34.4 million in FY 2019 (FY2018: £31.7 million). The adjusted PBT (profit before tax) on consistent reporting basis increased by 13 per cent to £42.4 million in FY2019 (FY2018: £37.5 million). The Group’s statutory PBT on consistent basis stood at £27.8 million in FY2019 (FY2018: £21 million), driven by strong growth of revenue and operating profit. The adjusted earnings per share on a consistent reporting basis stood at 27.6 pence in FY2019 (FY2018: 25.20 pence). The dividend per share surged by 20 per cent to 7.2 pence in the financial year 2019 (FY2018: 6 pence). The Net debt reduced by 20 per cent to £88.5 million in the financial year 2019 (FY2018: £111.3 million).

Financial Ratios – Strong Profitability Margins and Liquidity Profile versus Industry Median
 
 

Reported profitability metrics for the financial year 2019 were higher against the industry median. The Group has shown a decent growth trajectory on the profitability front, reflecting higher revenue generated and better control over expenses. On the liquidity front, Restore Plc’s current ratio was higher than the industry median of 1.07, reflecting sufficient current assets to pay the short-term obligations. On leverage front, the debt-equity ratio was 1.10x, which was higher compared to the last year data but remained in line with the industry median.

Share Price Performance Analysis


Daily Chart as on 7^th July 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On July 7, 2020, at the time of writing (before the market close, at 11:28 AM GMT+1), Restore Plc shares were trading at GBX 383.99, up by 1.72 per cent against the previous day closing price. Stock 52 week High was GBX 560.00 and low was GBX 339.00, respectively.

Bullish Technical Indicators

From the technical standpoint, the shares were trading well above the short-term support level of 10-day, 20-day and 50-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

Price/Earnings Approach (NTM)
 
 


To compare Restore Plc with the peers, Price/Earnings multiple has been used. The peers are HomeServe Plc (NTM Price/Earnings was 41.55), Inspired Energy Plc (NTM Price/Earnings was 38.16), Clipper Logistics Plc (NTM Price/Earnings was 24.08), Equiniti Group Plc (NTM Price/Earnings was 17.94) and Sureserve Group Plc (NTM Price/Earnings was 13.17). The Average of Price/Earnings (NTM) of the company’s peers was 26.90x (approx.).

Restore Plc Vs FTSE AIM 100 Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five years, Restore Plc share price has delivered 41.69 per cent returns as compared to 35.18 per cent returns of FTSE-AIM 100 index, which shows that the stock has outperformed the index during the last five years.

Industry Outlook Dynamics

As per the publication from Grand View Research, the global IT professional services market size is projected to grow by compounded annual growth rate (CAGR) of 8.4% to USD 1,070.28 billion by 2025 from USD 562.06 billion in 2017. The growth drivers for the industry include increasing adoption of IT professional services by various industries and increasing requirement for cybersecurity, transparency, and accountability in services. The factors that can negatively impact the growth are regulatory changes, lack of skilled labour, and risk of scandals in the accounting industry.

Growth Prospects and Risk Assessment

The Company is well-positioned in the market with the large-scale operations, tight control over the cost, strong domain knowledge and UK centric approach. It has built a long-term relationship with customers over the years. Moreover, it provides a one-stop shop with nationwide coverage. Also, it has made substantial technological investments over the years for future growth. Furthermore, it has a robust track record of accretive growth through successful acquisitions of 30 Companies to date. Overall, 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 Company seems financially stable to tap opportunities in the fragmented market in which they operate, to expand the market share. 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)

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 Company is holding a position in the United Kingdom as a market leader in business relocation and document management. The Company keeps on launching new platforms and upgrade the old products & 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 the local markets.In the short-term period, the market environment remains uncertain and volatile because of Covid-19 mayhem. The government restrictions have been impacting the activity level across the United Kingdom. Global political uncertainty regarding trade policy also poses a risk for the Group, including protectionist measures and regulation or legislation in local markets. Furthermore, the Company’s performance is subject to various other risks, including finance and liquidity risk, cyberattack risk, change in market dynamics, and loss of confidential customer records.

Business Outlook Scenario

The Company has shown an increase in financial performance in FY2019 period. Both the top-line and the bottom-line performance have improved, with decent profitability margins for the period. The Group also managed to control the operating expenses effectively for the period. The Group entered into the financial year 2020 with a strong financial position and sound business model. The trading environment is continuously improving, and Group expects to be profitable with strong liquidity and robust financial position for FY2020. The Group remained confident about the 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 pandemic. The 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 grew from GBP 129.4 million in FY16 to GBP 215.6 million in FY19, compounding at an annual growth rate (CAGR) of 18.5 per cent.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation at the current market price of GBX 383.99 (as on 7^th July 2020, before the market close at 11:28 AM GMT+1), with lower double-digit upside potential based on 26.90x Price/Earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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