Questor: Restore, a well run firm that provides an important service to vital organisations

Questor share tip: the document management group’s clients include the NHS and local and central government

Russ Mould 28 April 2020 • 6:00am

Man with boxes — Restore ended 2019 with £17m in cash and £52m of debt headroom

Few firms have as much visibility on revenues and cash flow as they would like at the moment but Restore, the document management specialist, is likely to be well above average in this respect thanks to the recurring revenues it generates from key customers, such as local and central government and the NHS.

While shares have fallen by some 15pc since our initial analysis in August last year, the resilience of the Aim-quoted company’s business model and the solidity of its finances mean even that slide compares well with a 24pc drop in the FTSE 100 index.

While no one can use relative performance to pay their bills, this does suggest that Restore will make it through the current crisis and be ready to thrive as and when broader business activity starts to normalise.

Last week’s trading update offered additional reassurance on this front. Charles Bligh, the chief executive, said the firm had run two scenarios. Even under the gloomier one, in which current restrictions remain in place until autumn and revenues pick up only slightly in the fourth quarter of 2020, the board believes Restore will remain profitable and within its banking covenants according to both the criteria attached to the £160m credit facility.

Restore ended 2019 with £17m in cash and £52m of headroom on that five-bank borrowing facility.

The understandable decision to scrap the final dividend saves £6m and the company has undertaken several other moves to cut costs. Better still, the debt is not due for repayment until 2023, so time is on the side of management, staff and shareholders.

In the interim, Restore will continue to book contracted revenues for document and digital records scanning and management. This provides a solid bedrock to sales and cash flow, even if the three other operations – shredding, office relocation and IT disposal and recycling – are all seeing lower levels of activity.

Earnings and dividend forecasts need to be treated with due caution but at the moment this is hardly the point.

Restore is a well run, well positioned, well financed firm that provides an important service to customers, many of which are vital to the nation, right down to the provision of recycled paper to loo-roll makers.

Nothing can be taken for granted in the current environment, but the firm feels more resilient than most and has the capacity to reward patient shareholders in capital terms and, we hope, via the eventual resumption of dividends.

Long-term investors should keep the faith with Restore.

Questor says: hold

Ticker: RST

Share price at close: 375p

Update: Telecom Plus

Telecom Plus, the multi-utility provider, was one of the first firms that this column identified as being better placed than most to survive the Covid-19 crisis, so it was pleasing to see the company issue a reassuring trading update last week.

Andrew Lindsay, the chief executive, stressed how quickly the firm had been able to adapt to the need for home working, while sales partners have adopted new online tools to win over new customers, and churn among existing clients has dropped.

This all sounds encouraging, especially as Telecom Plus has barely £50m of net debt, including leases, £55m in further borrowing available and no debt to repay until 2023 at the earliest.

In the year to March 2019, operating income and interest income of £45.5m in aggregate compared with interest expense of £1.5m. Interest cover of 30 times means there is lots of room for manoeuvre even if earnings start to weaken markedly and Mr Lindsay reaffirmed a commitment to pay an annual dividend of 57p a share, equivalent to a 4.4pc yield.

The one issue to watch is that of possible bad debts and consumers’ ability to pay during these straitened times. A rash of bad debts could crimp cash flow and the dividend.

Government support schemes for consumers should at least help here, and the company has – thus far – seen only a limited number of direct debit cancellations.

Telecom Plus’s balance sheet is sound and the business should prove more resilient than most.

Questor says: hold

Ticker: TEP

Share price at close: £12.96

Russ Mould is investment director at AJ Bell, the stockbroker.

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