‘Mission-critical’ services

The stock in focus is Restore (LSE: RST). It’s a London-based company that provides ‘mission-critical’ services to businesses such as document shredding, document scanning, data storage and erasure, and relocation services.

Listed on the UK’s Alternative Investment Market (AIM), it currently trades for £2.61. At that share price, the market-cap’s £353m.

Growth, value, and dividends

It has been a while since I’ve covered this stock. And looking at it today, the set-up is quite interesting, in my view.

For a start, the company’s growing at a healthy clip, helped by acquisitions. This year, revenue’s expected to come in at £345m – 25% higher than the figure for 2024.

One acquisition it made recently was that of Synertec. This business – which predominantly serves the NHS – specialises in outbound communications and Restore’s management believes that it offers “significant” growth potential.

Next, we have rising earnings. This year, Restore’s earnings per share (EPS) are expected to come in at 22.3p, up from 19p last year.

That forecast puts the price-to-earnings (P/E) ratio at 11.7. Using next year’s EPS forecast, the P/E ratio falls to just 10.4, so there could be some value on offer here.

It’s worth pointing out that management’s aiming to boost profit margins. In the medium term, it’s targeting 20% adjusted operating margins versus 17.7% in the first half of 2025.

We also have rising dividends. Currently, analysts expect a payout of 6.62p for 2025 versus 5.80p for 2024. That puts the prospective yield at 2.5%. Dividend coverage (the ratio earnings per share to dividends per share) is very high, so there’s scope for substantial increases to the payout.

Finally, analysts seem to be bullish on the stock. At present, the average price target is 383p – about 47% above the current share price.

I’ll point out that the average price target for Lloyds is only about 12% above the current price while the average target for Rolls-Royce is actually below the current price. So analysts see far more potential here.

A value play

Now the stock’s not perfect, of course. One issue is that there’s some uncertainty in relation to the long-term outlook for the document storage and shredding segments due to the fact that businesses are using less paper these days.

Another issue is that, as a result of acquisitions, debt has piled up. At the end of June, the company had net debt of £120m on its books.

Weighting everything up however, I see quite a bit of appeal in this one. In my view, it’s worth considering as a value play.

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That said, I’m kicking myself for not buying a few stocks that I analysed throughout the year. Here’s a look at three companies I regret not buying.

Impax

Asset manager Impax (LSE: IPX), which focuses on sustainable investment strategies, is a stock that I’ve been interested in for a while. The reason for this is that interest in sustainable investing is increasing at an exponential rate right now.

Back in late October, IPX shares were trading at around 260p and the P/E ratio was around 20. That looked quite appealing to me and in a report on 24 October, I said that the stock was a ‘buy’. But unfortunately, I didn’t buy the stock myself. I regret that now, as the share price has climbed around 40% since then to 369p on the back of strong full-year results in which assets under management climbed 21% for the year.

Would I buy Impax now? Probably not, to be honest. Given that the forward-looking P/E has climbed to 30, there’s not much value left, in my view. For now, the stock will remain on my watchlist.

Restore

Restore (LSE: RST), which provides essential services such as document storage and shredding to offices and workplaces, is a stock that was well and truly beaten up in the final quarter of last year. Indeed, by early 2019, its P/E ratio was just 10 – an absurdly cheap valuation given the company’s growth.

When I covered Restore on 18 March at 295p, I said that the stock was a ‘buy’ and that it deserved to trade on a P/E ratio of at least 15, meaning there could be 50% upside. However, I didn’t buy it myself and I regret it. Since then, the stock has soared to 554p on the back of strong results, which means that it has gained nearly 90%.

Is there any value left now? Well, currently, analysts expect the group to generate earnings of 29.4p for next year. That puts the stock on a forward P/E of 18.8. That’s not outrageously expensive, however, it’s also not a bargain valuation. 

Workspace

Finally, FTSE 250 property group Workspace (LSE: WKP), which provides flexible office, co-working, and meeting room solutions to fast-growing, early-stage companies in London. I listed WKP as my top stock for February but never bought it myself.

Like so many other UK-focused companies, Workspace was hit by Brexit uncertainty throughout the year and there were several occasions when you could have picked the stock up for around 800p with a yield of 4%+. In hindsight, that was a bargain. Today the shares change hands for over 1,200p, meaning they’re 50% higher. With the forward-looking P/E ratio now at 26, the stock looks fully valued, in my view.

Ultimately, the takeaway here is that short-term share price weakness can present fantastic buying opportunities. Throughout the year, WKP released some strong results and raised its dividend significantly, but this wasn’t reflected in the share price. If only I’d followed Warren Buffett’s philosophy and loaded up when others were fearful…

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While some smaller companies have shown signs of recovery recently, many promising businesses are still trading well below their 2018 highs. As such, there are some attractive investment opportunities around at the moment for risk-tolerant investors. With that in mind, here’s a look at one smaller company that I believe offers serious outperformance potential right now.

Restore

£330m market-cap Restore (LSE: RST) provides services to offices and workplaces in the private and public sectors, specialising in document storage, document shredding, and workplace and IT relocation. Perhaps not the most exciting business model in the world, yet one that’s highly effective in generating consistent profits, nevertheless. The stock is a favourite of UK small-cap specialist Mark Slater – one of the best stock pickers in the business.

Restore shares have taken quite a hit over the last six months, falling around 40%. As a support services company, it appears investors have put the stock in the same basket as the likes of Carillion and Kier, which have struggled in the current economic environment. Yet looking at today’s full-year FY2018 results from Restore, I’m convinced the share price fall has been excessive. As such, I think a big rebound could be on the cards.

Strong growth

Indeed for the full year, revenue rose 14% and profit before tax climbed 20%. Earnings per share were up a healthy 12%, marking the ninth consecutive year of double-digit earnings growth. These are good numbers, considering the economic and political uncertainty the UK has experienced over the last year.

Furthermore, the company increased its dividend by a healthy 20% – which signals management is confident about the future. CEO Charles Skinner was upbeat about group’s outlook, commenting: “Restore remains well positioned to build upon the gains made in 2018, with the Group’s broad base of recurring revenues and strong cash generation providing a stable platform for continued growth.”

Important services

What I think the market is missing about Restore is just how important its services are. For example, shredding may not sound exciting but, in reality, it’s a fundamental service that the majority of companies need. With data regulation becoming more stringent (GDPR) and identity theft on the rise, companies cannot afford to be complacent here.

It’s also worth noting that Restore enjoys a high degree of recurring revenues. As Slater has pointed out, its document storage services essentially generate an annuity stream as boxes are typically stored for many years.

Valuation offers upside potential

Looking at Restore’s current valuation, I believe there’s potential for significant upside. For FY2019, analysts expect the group to generate earnings per share of 27.8p, which at the current share price places the stock on a forward P/E of just 10.1. For a company that has increased its earnings by 62% and lifted its dividend by 88% in the last three years alone, I think that valuation is way too low.

In my view, the stock deserves to trade on a P/E of at least 15, which means there could be nearly 50% upside. As such, I rate Restore as a ‘buy’ right now.

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Unfortunately, TP ICAP (LSE: TCAP) as the new business is called, has failed to live up to expectations.

Complex business

It was all going well until the beginning of 2018. Soon after shares in TP ICAP hit a new all-time high of around 550p, the company disappointed analysts by warning that higher than expected costs associated with investment in its business and complying with new regulations would hit profits for the full year.

Following the warning, analysts have revisited their numbers. They now expect earnings per share (EPS) to fall by 22% for 2018.

The market has reacted to this news badly. The stock has lost around half its value since peaking in January and now changes hands for just 8.2 times forward earnings.

However, I reckon this is an overreaction. Merging two businesses was always going to be a complex operation, and while earnings may suffer in the short term due to rising costs, over the long run, the group’s enlarged scale should more than make up for earnings volatility.

According to analysts, after falling this year, in 2019 EPS should stabilise. What’s more, TP ICAP’s low valuation gives a wide margin of safety for investors if growth stutters again and also offers plenty of upside potential for when the company finally returns to growth.

Indeed, right now the rest of the financial services sector trades at a forward P/E of just under 15, indicating a potential upside of more than 82% for when confidence in the company returns. And as well as the low earnings multiple, investors will also receive a 6.1% dividend yield, which looks to me to be extremely secure as it is covered twice by EPS.

Premium growth 

It has been a better year for document manager Restore (LSE: RST). Even though the company’s share price has drifted lower by around 15% since the beginning of the year, analysts are still forecasting EPS growth of 49% for 2018, followed by an increase of 13% for 2019.

It looks to me as if Restore is well on the way to meeting this goal. The company’s half-year results (published this morning) showed a 9% uplift in revenue year-on-year to £95m and 13% increase in profit before tax to £17.3m. 

For the rest of the year, the company’s bottom line is set to see a boost from the acquisition of TNT Business Solutions, which Restore completed in May. Like TP ICAP, Restore faces a challenge to integrate the bolt-on acquisition over the next few months, but when completed, the enlarged group should be well placed to produce positive returns for investors — as current City numbers show.

The one downside I can see is that Restore’s valuation doesn’t leave much room for mistakes. Trading at a forward P/E of 17.2 there’s already a lot of good news baked into the stock price. However, if the company can hit City growth targets, I think the multiple is justified.

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But does that mean investors should rush to buy Premier Oil stock in hopes of further significant gains in its share price?

Well, bullish investors have a few points to make in their favour. One is that Premier’s production levels are ramping up significantly thanks to the Catcher field in the UK. In 2016, the company produced 71.4k barrels per day but is now guiding for 80k-85k for this year. And with operating costs per barrel down to $17/$18, the company is kicking off positive cash flow with oil prices where they are today.

The bad news is that this increased cash flow will be flowing directly to creditors instead of shareholders since net debt at the end of June was still a whopping $2.65bn. Management is confident that it will be able to bring net debt down to 2.5 times EBITDA by the end of March 2019, when its recently-amended covenants require a net debt to EBITDA ratio of under 3x.

However, this deleveraging is contingent on oil prices staying where they are right now, which is far from certain. Also, while Premier is making progress, its forward P/E ratio of 10.5 is no screaming bargain considering its balance sheet woes and lack of dividend. With oil prices unlikely to rise by 50% or more in the near future, as they have in the past year, I see no great catalyst for Premier’s share price to rise as rapidly as it has over the past year.

A roll-up growth story 

I see much more growth potential in stock for business support services provider Restore (LSE: RST). The company has grown rapidly in recent years by rolling up a series of smaller businesses to create a UK-wide leader in an array of unsexy but necessary services such as document shredding, physical and online document storage, and relocation assistance.

Last year alone, the group’s revenue increased by a full 36% to £176.2m while operating profits grew by a similar amount to £33.7m. And the first half of 2018 appears to be going just as well as management’s update disclosed trading was in line with expectations. A big boost will have come from businesses scrambling to shred or safely store customer data ahead of GDPR implementation, a trend which will hopefully persist as businesses become more aware of the financial pitfalls from misplacing customer data.

Looking forward, the group still has room to expand its core divisions as well as branch out into offering related services. With net debt at a little under 2x EBITDA it certainly has the financial firepower to continue making further acquisitions or focus on organic growth.

At its current valuation of 19 times forward earnings, I reckon Restore is a compelling buy-and-hold stock thanks to its attractive business model, rising dividends, and management’s proven ability to buy smaller rivals at good prices and successfully integrate them into the larger group.

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The language and translation services provider advised last week that, due to the impact of adverse currency movements since the start of the fiscal year — namely the rampant strengthening of the pound — profits have taken a whack. It added that full-year profits may miss expectations should these exchange rate issues persist during the remainder of the period.

I see this as no reason to panic and sell up, though. Firstly, the sterling strength witnessed more recently may be difficult to sustain given that economic deterioration in the UK has shown signs of accelerating more recently, as illustrated by disappointing first-quarter GDP data last Friday.

Irrespective of these near-term currency-related problems, I am convinced that RWS, which has seen sales and profits shoot higher every year for well over a decade, remains in great shape to deliver brilliant earnings expansion. Demand for its products continues to boom and revenues leapt to £139.6m during October-March from £76.6m a year earlier.

Translation titan

Indeed, despite its latest trading statement, the City is still expecting earnings at RWS to keep surging at double-digit percentages and a 25% rise is forecast for the year to September 2018. An extra 11% advance is forecast for fiscal 2019.

And this leads means that the AIM-quoted business can be picked up on a dirt-cheap forward PEG reading of 0.8, comfortably below the accepted value territory of 1 or below.

An added bonus is that RWS’s bright growth prospects, exceptional cash generation and solid balance sheet with net debt coming in at a better-than-expected £84m as of March, mean dividends are expected to continue improving at quite a pace too.

The Square Mile predicts that last year’s total reward of 6.5p per share will jump to 7.3p in the present period, and again to 8.2p in fiscal 2019. These figures yield 2% and 2.2% respectively. I reckon RWS is a brilliant buy today.

A proven growth hero

Like RWS, Restore (LSE: RST) also has a great track record of delivering eye-popping earnings and dividend growth. The bottom line has more than doubled during the past five years and City brokers expect a lot more where that came from.

A 15% advance is forecast for 2018, and an extra 12% rise is predicted for next year. While a consequent prospective PEG reading of 1.5 may sit above that of the languages specialist, this is still great value in my opinion given the rate at which the office services provider continues to win business.

Revenues at AIM-quoted Restore jumped 36% year-on-year during 2017, to £176.2m, the impact of recent acquisition activity helping to swell the top line. And with the company showing no signs of letting up in the hunt for M&A — it splashed out £88m in March to buy TNT Business Solutions to boost its position in the record management segment — I fully expect profits to keep swelling at a terrific rate.

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Quixant

£250m market cap Quixant (LSE: QXT) has been a wealth generating machine for investors since it floated back in 2013, with the stock rising from its IPO price of 46p to 380p today. In other words, if you had invested just £1,000 in the IPO less than five years ago, your stake would be worth over £8,000 now. That’s the kind of prolific return I was talking about.

Quixant designs and manufactures advanced hardware and software solutions for the global gaming industry. Both revenues and profits have exploded higher in recent years, and this morning’s full-year FY2017 results revealed that the company has strong momentum at present.

Indeed, for the year ended 31 December, revenue climbed 21% to $109.2m, with pre-tax profit rising 29% to $15m. Adjusted fully diluted earnings per share surged 38% to 22.9 cents. CEO Jon Jayal commented: “We have started 2018 with robust trading performance and are well positioned to deliver full-year growth ahead of our previous expectations. The new prospects we are working on give us confidence in our longer-term growth prospects.”

After trading above 450p in January, the shares have pulled back a tad recently, although they are up strongly today. At the current price of 405p, the forward-looking P/E ratio is a reasonable 22.8. As such, I believe now could be a good time to consider the stock for your ISA.

Restore

Another small-cap stock that has delivered stunning shareholder returns is Restore (LSE: RST). Over the last five years, the shares have flown from 120p to 500p, turning £1,000 into £4,200.

Restore specialises in document storage, document shredding and workplace relocation. This is obviously not the most exciting business model in the world, yet it appears to be a profitable one for the £570m market cap company.

Like Quixant, revenue and profits have trended upwards over the last few years, and full-year results released last week showed further progress with revenue and earnings per share climbing 36% (7% organic) and 25% respectively. The group hiked its dividend by an impressive 25%.

I’ve had my eye on this company for a while as it’s a favourite of fund manager Mark Slater – one of the top small-cap stock pickers in the UK. The shares have pulled back in recent months, and as a result, with the forward P/E at just 18.4, I think now could be a good time to get involved.

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Over the past five years, it has gone from strength to strength as the demand for office services has risen. Today it reported revenue for 2017 up by 36% and profit before tax up by a similar amount thanks to increasing demand for its services overall, but also the significant office move by Bloomberg in London. This move helped grow revenue from relocation services by 25%. A large part of the growth also came from acquisitions. Organic revenue growth across the group was just 7%. Earnings per share increased 25% to 22.4p.

Boost from regulation 

As well as providing office services, Restore offers document management, a tedious but essential business for companies concerned about document security. 

This division is exposed to see a substantial benefit in 2018 from the introduction of the European Union’s GDPR data protection laws that give consumers more control over their data, giving them the right to ask firms to erase any records stored about them. Restore’s management believes that when this regulation comes into force in May, the company will “see more major projects for our records management operations…as more enterprises understand the need to ensure secure shredding of relevant documents, and also in scanning, driven by the need for enterprises to access their customer data more quickly.” 

And as the demand for Restore’s services grows, shareholders should be well rewarded. Today the company announced a 25% increase in its full-year dividend to 5p per share. 

This means a dividend yield of 1%, although it is not the current level of the yield that I’m interested in, it is the potential for further growth. Indeed, the 5p payout is covered five times by earnings per share, leaving plenty of room for growth. Over the past five years, the distribution has grown at a rate of 32% per annum, and if this continues, by 2023, the payout will have increased to 20p per share, for a yield of 4% based on the current stock price.

Cash-backed dividend 

Another company I like the look of is data business YouGov (LSE: YOU).  Demand for its surveying and data analytics offering has seen net profit increase at a rate of nearly 70% per annum on average over the past five years. City analysts are expecting a similar rate of growth in 2018 with earnings per share growth of 135% expected and an increase of 15% for 2019.

Unfortunately, the market has already priced the shares for perfection based on these projections. Right now the stock is trading at a forward P/E 32. However, once again it’s the dividend potential I’m interested in here. At the end of fiscal 2017, the company reported a net cash balance of £23m, enough to fund the current per share distribution of 2p for more than 10 years. The distribution itself is covered 4.6 times by earnings per share, leaving plenty of room for growth as revenues continue to expand. If the dividend continues to grow at its historical rate of 32% per annum, in five years, the shares will support a dividend yield of 2.3% based on the current stock price.

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Judging by the firm’s year-end trading update released this morning, these index-walloping returns could be set to continue for a long time to come. This is because the company continues to build on its market-leading position in document management while also consolidating the fragmented markets for related professional services such as document shredding, IT asset disposal and toner recycling.

The trading update provided no firm figures but disclosed the business was continuing to make good progress and that sales, profits and earnings per share would all be significantly ahead of last year. This is no surprise when considering the company’s H1 results, in which organic growth and acquisitions led to revenue rising 57% to £86.9m and EBITDA increasing 59% to £19.5m.

Looking forward, I wouldn’t be surprised if this level of top line growth slowed significantly in 2018 as Restore’s management focuses on integrating a slew of recent acquisitions and works to lower net debt levels of around 2x EBITDA. But with plenty of scope to improve margins and cash flow, and also plenty of acquisition targets out there in a fragmented industry, I believe now could be an interesting point to begin a stake in Restore at a sane valuation of 22 times forward earnings.

Growth has never tasted so sweet

Another high-growth stock I’ve got my eye on is speciality ingredients manufacturer Treatt (LSE: TET), whose share price has risen 420% over the past decade. This growth has been driven by management repositioning the business as an innovation-led developed of flavours and scents used in everything from tea to soap and haircare products.

And within this overarching category of speciality ingredients, Treatt has benefitted immensely from its expertise in all natural citrus flavours. Sales of these ingredients have been rocketing in recent years as consumers have shifted towards preferring all natural ingredients in their drinks as well as less sugar, another area in which Treatt has expertise.

Management has built the company’s expertise in these areas into a major selling point for winning new contracts with global fast moving consumer goods firms. This is clear in the group’s results for the year to September, with revenue up 24.5% to £109.6m, and operating profits up 44.6% to £13.8m as margins rose significantly.

There’s good reason to believe this level of growth is entirely sustainable as Treatt moves deeper into the massive US market. The group already has a manufacturing facility there but a recent £21.6m fund-raising with institutional investors will provide the capital to expand and modernise facilities in the US and UK to support accelerating sales growth.

Treatt’s impressive record of success, double-digit margin improvements and growth opportunities mean its shares aren’t traditionally cheap at 24.7 times forward earnings. But with plenty of room to further exploit its niche positions, no debt and rising dividends, I think Treatt could continue to richly reward shareholders.

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The Gym Group

There are no prizes for guessing what The Gym Group (LSE: GYM) does. The £290m market cap group is the owner of 128 budget gyms across the UK and is rapidly rolling out new gyms at a rate of around 15-20 per year. It now has an estimated 22% share of the low-cost gym market and has captured around two-thirds of the market’s growth since March last year. Does the company have investment potential? I believe so.

A trading update released this morning for the year ended 31 December looks solid. For 2017, total year-end memberships rose by 36% to 607,000, with revenue climbing 24%. Management sounded upbeat about the future, with CEO John Treharne stating: “Looking ahead, we have a very strong foundation and a proven rollout model from which to build the business and increase its profitability further.”

Are the shares attractively priced? With analysts forecasting earnings per share of 9.1p for FY2018, The Gym Group currently trades on a forward-looking P/E of 25. While that’s clearly not a bargain valuation, I don’t believe it’s an unreasonable one either, given the company’s growth. If GYM can execute on its growth plans, I see no reason why the shares can’t keep trending upwards.  

Restore

Another small-cap company with strong growth prospects for 2018 is Restore (LSE: RST). The £640m market cap company provides services such as document storage, document shredding and workplace relocation. The stock is a favourite of UK small-cap specialist Mark Slater,- one of the best stock pickers in the business.

Restore doesn’t have the most exciting business model in the world, yet sometimes, boring investments can be highly successful. In Restore’s case, a £2,000 investment five years ago would now be worth around £10,000, a gain of almost 400%. Are there more gains to come? For long-term investors, I think there could be.

The company stated in September that the second half of 2017 had started well and that the Board expected to deliver a full-year performance “slightly ahead of previous expectations.” Analysts expect the momentum to continue in 2018, with revenue and net profit growth of 6% and 15% forecast respectively. A dividend hike of approximately 24% is also currently anticipated.

What about the valuation? The shares currently trade on a forward-looking P/E of 22.1, which, like The Gym Group’s valuation is not a bargain. However, at the same time, I don’t think that price metric looks excessive either, given Restore’s growth track record and future prospects. A glance at the chart reveals that the share price has been trending upwards slowly for around eight years now. If the company can keep growing its profits, there’s no reason this upwards trend can’t continue.

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