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Questor: a severe slump in valuation could make this the time to buy a stake in Restore
Questor share tip: the document management group has just announced promising results and the shares no longer look expensive
After a frustrating 2018, Restore, the data and document management systems expert, appears to be back on form, judging by last month’s interims.
Profits rose nicely, cashflow was strong, debt came down and the dividend was raised by 20pc. As a result, the firm looks well placed to add to a nine-year streak of double-digit percentage increases in earnings per share and a run of rises in the annual divi that stretches back to 2011.
Restore’s expertise places it in a very sweet spot at a time when consumers are increasingly aware of privacy and more and more companies are facing penalties for poor management of data.
But worries about debt, a slow start at last year’s TNT Business Solutions acquisition, some disappointment with the initial benefits of the GDPR data regime and the retirement of Charles Skinner as chief executive after a decade at the helm combined to hold back the shares in 2018.
That sell-off now looks overdone. The sale of the printer cartridge business ate into some of Restore’s debt and the new boss, Charles Bligh, has shifted the focus from deal-making to cutting costs, reducing borrowing and increasing cross-selling between the different operations.
The early signs are good. A 17pc leap in underlying operating profit in the first half boosted cashflow and that in turn further reduced debt (which includes some lease liabilities) and facilitated the dividend rise.
A 1.6pc yield may not shout out at income-seekers but the dividend growth streak is encouraging and last year’s share price slump means the stock trades on 16.2 times forecast earnings, a long way from the 23 to 24 level afforded the stock at its highs in early 2018.
The shares are rallying but last year’s fall in valuation could provide a good entry point.
Questor says: buy
Ticker: RST
Share price at close: 440p
Update: Coats
A solid set of interim results from Coats, the industrial threads specialist, last week gave no indication that the investment case for the FTSE 250 stock was coming unstitched, so patient investors can hold the stock in anticipation of further capital growth and dividend rises.
Currency movements, accounting changes regarding leases and difficult retail and industrial markets will all weigh on earnings this year but the first-half figures show improved sales, operating margins and cashflow.
A 10pc dividend rise spoke of management’s confidence in the future as Coats continues to invest in product development and reap the benefits of its Connecting for Growth transformation programme.
We have had more than 2p in dividends since we tipped the shares in June 2017 and although we have made a very small capital loss the stock is worth holding.
Questor says: hold
Ticker: COA
Share price at close: 73.95p
- Read Questor’s rules of investment before you follow our tips
Update: Marston’s
Our initial look at brewer and pubs group Marston’s in June is falling rather flat after a trading update last month showed sales momentum slowing. There is no need to panic, however, and the decision by the board to accelerate plans to reduce the firm’s debt actually plays to our investment case.
To bolster its plan to cut net debt by £200m during 2020-23, Marston’s will defer £70m of investment in new sites and reallocate up to £30m to existing ones where returns are better.
The earnings impact is expected to be minimal but cashflow should benefit to the tune of £40m-£50m. Add the plan to generate a further £130m in cash via asset disposals by 2023 and the all-important 7.5p-a-share dividend should start to look much safer, underpinning the 7pc yield.
The glass is still half-full at Marston’s.
Questor says: hold
Ticker: MARS
Share price at close: 106.9p
Russ Mould is investment director at AJ Bell, the stockbroker
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.
