Document management firm Restore (LSE: RST) isn’t a household name, but the tiny £400m market cap firm has rewarded its investors with a 300% rise in share prices over the past five years alone. And full year results released this morning, which showed an 41% increase in revenue year-on-year, leads me to believe this rally can continue for another five years.
Reliable recurring revenue streams
This rapid growth has been driven largely by an £83m acquisition that made its document shredding business the second largest in the UK. This continues a solid record of acquisitions that have also made the company the second largest provider of document storage space in the UK.
Economies of scale and cost-cutting improved operating margins to an impressive 19.3% for the year. This should continue, as new acquisitions are integrated and further cross-selling opportunities with current customers feed through.
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As the second biggest player in its two largest markets there probably isn’t much room for further transformative acquisitions. But the company is supplementing solid organic growth with a move towards higher growth areas, such as document scanning and online storage. These business lines are a natural extension of Restore’s capabilities and competitive advantages, and are growing quickly — over 8% alone in 2016.
With margins rising and little need for extensive capital investments, the business also kicks off considerable cash flow. High cash flow will be necessary in the years to come, as two major acquisitions in two years has driven net debt up to £72.3m, or 2.46 times EBITDA.
But as cash flow rises this is a very manageable amount of leverage for a non-cyclical company such as Restore. I believe the company’s reliable recurring revenue streams, growth opportunities and improving margins make its shares a steal at 17 times forward earnings.
A turnaround very much in progress
One company Restore is very familiar with is logistics firm Wincanton (LSE: WIN). from whom it bought a document storage business for £55m back in 2015. This has proven to be a very good deal for both involved, as it allowed Wincanton to pay down some of its debt and refocus on growing its core logistics business.
So far this turnaround is bearing fruit, as margins and profits are rising while net debt fell 48.2%, to £32.3m, in H1. The company’s retail and consumer segment is also growing quickly as e-commerce becomes more and more important, and retailers need help creating distribution centres and deciding how to most effectively get their products to consumers.
The downside to this is that operating margins of 3.7% from this division lag significantly behind the 5.9% operating margins of the the transport and logistics division. But overall operating margins in H1 did improve from 4% to 4.6%, which suggests management’s renewed focus on the core business is paying off.
That said, with margins this low there’s little room for error. Wincanton’s shares may look cheap at 10 times forward earnings, especially considering the firm’s non-cyclical characteristics, but I’d need to see further margin improvement and a return to sales growth before I bought shares.
