Storage Decline And Rising Costs Will Dominate Yet Digital Lifts

Key Takeaways

• Legacy physical storage and document management face structural decline from digitization, while relentless M&A introduces integration and margin risks to long-term growth.
  
• Expansion into sustainable asset recycling and digital services offers opportunity, but execution challenges, cost pressures, and competitive threats may limit their overall impact.
  
• Digital transformation and AI adoption threaten Restore's core revenues while reliance on acquisitions and rising costs jeopardize long-term profitability and margin stability.

Catalysts

Provides secure and sustainable business services for data, information, communications, and assets primarily in the United Kingdom.

• While the exponential growth of data and increasing regulatory demands support robust long-term demand for secure information management and destruction, Restore's core physical storage and document management businesses risk secular decline as more clients fully digitize records and accelerate cloud adoption, potentially capping long-term revenue growth.
  
• Although the company is realizing margin improvements via property consolidation, digital automation, and cost reduction programs, Restore remains exposed to mounting wage inflation, logistics expense, and operational complexity from integrating legacy infrastructure and acquired businesses, which could pressure future net margins.
  
• Even as bolt-on acquisitions in highly fragmented shredding and information management markets are currently earnings accretive and available at reasonable valuations, persistent reliance on M&A for growth carries the risk of integration difficulties, cultural mismatch, or unexpected impairments-threatening the sustainability of EBITDA growth and capital returns over time.
  
• Strong secular trends around sustainability and circular economy partnerships should favor Restore's position in asset recycling and destruction; however, scaling these offerings could require significant incremental investment and expose the company to price competition, regulatory scrutiny, or thin margins, which may limit their impact on group earnings.
  
• While Restore is investing in proprietary digital platforms and emphasizing cross-selling of higher-margin integrated services, the pace of customer adoption, the potential for technology-led disruption, and slower-than-expected progress in the Digital division may result in continued revenue and margin volatility, especially if execution lags behind digital-native competitors.

Restore Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Restore compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Restore's revenue will grow by 10.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.1% today to 7.1% in 3 years time.
• The bearish analysts expect earnings to reach £28.4 million (and earnings per share of £0.23) by about August 2028, up from £9.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.6x on those 2028 earnings, down from 39.0x today. This future PE is lower than the current PE for the GB Commercial Services industry at 27.2x.
• Analysts expect the number of shares outstanding to grow by 0.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.46%, as per the Simply Wall St company report.

Restore Future Earnings Per Share Growth

Risks

• The ongoing digital transformation and widespread cloud storage adoption threaten Restore's core physical records storage revenues, as scan volumes were noted as down, and long-term demand for storing physical boxes is likely to decline, posing a risk to top-line growth and future revenue stability.
  
• Technological disruption from advanced AI-driven document management and increasing customer preference for digital alternatives could accelerate obsolescence of Restore's legacy infrastructure, leading to potential asset write-downs and long-term compression of net margins.
  
• Reliance on acquisition-driven growth in highly fragmented markets carries significant integration risks; a heavy acquisition pipeline combined with already elevated net debt and leverage close to stated limits could strain returns on capital, impair margin expansion, and reduce earnings quality if synergies fail to materialize as expected.
  
• The Harrow Green relocations business remains in persistent structural decline, with commoditization and weaker demand for large, complex moves due to hybrid work and simpler office layouts, which has resulted in consistently falling revenues and margins-potentially eroding group profitability if market conditions do not recover.
  
• Rising labor costs from minimum wage increases and ongoing operating cost inflation pose a structural challenge in logistics-heavy businesses like Restore's, particularly since management acknowledges cost-cutting options are nearly exhausted, meaning future earnings growth may be limited by wage pressure and margin squeeze.

Valuation

• The assumed bearish price target for Restore is £3.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Restore's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £5.94, and the most bearish reporting a price target of just £3.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £397.8 million, earnings will come to £28.4 million, and it would be trading on a PE ratio of 18.6x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of £2.65, the bearish analyst price target of £3.0 is 11.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.