Digital Integration And New Facilities Will Improve Operational Efficiency

Key Takeaways

• Integration of business units and relocation to cost-effective facilities enhance operational efficiencies and net margins through cost reductions and efficient service delivery.
  
• Winning significant public sector contracts and acquiring Synertec solidify market leadership and provide avenues for recurring revenue and margin growth.
  
• The company faces challenges in digital business performance, paper price volatility, relocation market struggles, integration risks, and reliance on public sector contracts.

Catalysts

Provides services to offices and workplaces in the public and private sectors primarily in the United Kingdom.

• The integration of digital and records management businesses into one unit enables cost reductions and efficient service delivery, likely enhancing net margins and driving revenue through bundled service offerings.
  
• The relocation into new, more cost-effective facilities designed for higher capacity will lead to operational efficiencies and rent savings, ultimately boosting net margins by lowering costs per box stored.
  
• The announcement of winning significant contracts in public sector mailrooms sets a foundation for recurring revenue growth as these services expand and solidify Restore's market leadership.
  
• The proactive hedging of paper prices provides stability in the Datashred division, minimizing volatility and allowing for predictable earnings, thereby improving overall profit margins.
  
• The strategic acquisition of Synertec positions Restore to leverage cross-selling opportunities within the public sector, offering potential revenue and margin growth through expanded service lines and customer synergies.

Restore Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Restore's revenue will grow by 11.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 6.6% in 3 years time.
• Analysts expect earnings to reach £25.5 million (and earnings per share of £0.19) by about May 2028, up from £12.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £28.6 million in earnings, and the most bearish expecting £22.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.0x on those 2028 earnings, up from 24.8x today. This future PE is greater than the current PE for the GB Commercial Services industry at 25.6x.
• Analysts expect the number of shares outstanding to decline by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.45%, as per the Simply Wall St company report.

Restore Future Earnings Per Share Growth

Risks

• The company has experienced weak performance in its digital business due to poor bulk scanning sales and complex onboarding costs, impacting revenue and net margins in that division.
  
• The paper price volatility in the Datashred business could continue to affect margins and earnings despite recent hedging attempts to stabilize prices.
  
• Harrow Green, dealing with relocations, has faced a tough market with few big moves, which might lead to lower revenue growth unless market conditions improve.
  
• The integration of newly acquired companies like Synertec carries risks related to achieving expected synergies and maintaining current operating margins, which could affect overall earnings.
  
• Dependence on public sector contracts, representing a significant portion of revenues in some divisions, poses risks related to potential budget cuts or policy changes that could impact revenue consistency.

Valuation

• The analysts have a consensus price target of £3.843 for Restore based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be £384.3 million, earnings will come to £25.5 million, and it would be trading on a PE ratio of 26.0x, assuming you use a discount rate of 8.5%.
• Given the current share price of £2.25, the analyst price target of £3.84 is 41.5% 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.