Questor: Restore is well placed even if hybrid working encourages more offices to downsize
July’s putative approach from Marlowe is now behind the company and Restore is clearly staying focused on the day job if last week’s trading update is a fair guide. July’s return to the dividend list hinted at management’s gathering confidence in trading and the combination of improving business momentum and a solid balance sheet (even allowing for lease commitments) appears to provide a nice balance between the potential for gains and protection from losses.
Investors could be forgiven for thinking that Restore’s expertise in data and documentation management leaves it in an uncomfortable position as legions of commuters debate the extent to which they will return to the office in the future.
Yet the opposite may hold true. Restore could be well placed if companies decide to cut office space, or downsize, should hybrid office/home models become more popular, thanks to its office removals, IT recycling and shredding operations.
Data management and privacy will be paramount no matter where employees are based. April’s purchase of EDM enhanced the market position of Restore’s document storage and digital operations and August’s swoop for PRM Green bolstered its already powerful IT recycling capabilities.
It is certainly interesting to note chief executive Charles Bligh’s comment in the update that sales and earnings before interest, taxes, depreciation and amortisation (Ebitda), at current run rates, are above the pre-pandemic levels of 2019.
Further acquisitions are being lined up to supplement organic growth and it is possible that Marlowe’s opportunistic approach may spur on management.
The 530p-a-share offer only came with 71p in cash and the rest in Marlowe stock, but it did represent both a 26pc premium at the time and a healthy uplift on our entry point in August 2019. Restore’s shares are still trading below that level.
The Marlowe approach highlights the stock’s potential. Hold.
Questor says: hold
Ticker: RST
Share price at close: 490p
Update: Zytronic
It is hard to imagine a more difficult environment for a manufacturer of touch-sensitive screens than a pandemic and a time when people are shunning contact, but Zytronic’s trading update last week hinted that its sales, profits and cash flows may finally be emerging from the doldrums.
It is unlikely that chief executive Mark Cambridge and his colleagues will be getting too carried away, even if sales in the second half were 30pc higher than those of the first and Zytronic is breaking back into profit for the full year ahead of expectations.
The lumpy nature of contracts and limited visibility mean profits can move sharply up or down in the near term. Since the company’s flotation in 2000 annual profits have fallen year on year on four occasions – in 2002, 2007, 2010 and 2013 – before suffering a longer dip from 2018 to 2020.
But the balance sheet has net cash, even after this year’s return of £6.7m to shareholders via a tender offer, and that asset, plus Zytronic’s lowly valuation, offers some protection to shareholders.
The company’s £19m market value is underpinned by its £7.8m cash pile, so investors are effectively valuing Zytronic’s operations at £11.2m. This does not seem to be a king’s ransom for a business whose sales and net profit since 2000 have averaged £14.7m a year and £1.7m a year respectively.
Granted, clear risks remain, over and above the pandemic (as if that were not enough on its own). Zytronic must continually adapt to shifts in technology and invest in development to meet the needs of its customers but it must do so with limited revenue visibility. The order book usually extends for only a few months and there are no service or maintenance revenues to speak of, since reliability must be a key initial selling point.
That £19m market value also compares with peak net profits of £4.6m (a multiple of only four) and is just 12 times average net profits. Both multiples suggest the recovery in the shares has further to run as long as trading begins to return to something vaguely akin to historic norms. We are sat on a large book loss here, but the update suggests we can afford to be patient. Hold.
Questor says: hold
Ticker: ZYT
Share price at close: 175p
Russ Mould is investment director at AJ Bell, the stockbroker
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