Johnson Service ripe to re-rate

Rewind two years and Johnson Service faced a real challenge. The recession took a major toll, particularly on the dry cleaning business, and management knew the company needed a change of direction. It shifted the focus to the textile division, which rents and cleans linen and workwear. In March this year it further consolidated its foothold in this market with the £22m acquisition of Bourne Services Group, part-funded by £12.8m of cash proceeds from a share placing, which moved it into the hotel linen market. The deal helped fuel a 10 per cent jump in textile rental revenues to £74m, as well as a 25 per cent improvement in adjusted operating profit to nearly £11m in the first six months of 2014.

The division's Apparelmaster workwear rental brand has been performing well, with increased sales to existing customers, new business wins and better customer retention rates during the first half. The operation will get an added boost when a new work-wear factory, currently under construction in Leeds, doubles processing capacity in 2015. Meanwhile, the corporate and hospitality linen operation is rebuilding sales and boosting profitability following the decision to exit a large low-margin contract last year.

Admittedly, the dry cleaning business remains the company's Achilles heel. The recession took a bite out of the market, forcing consumers to think twice about expensive, individual laundry services. In early 2012 when this problem was pronounced, chairman John Talbot said the company was "acutely sensitive" to "bad economic news". Today, revenues in the division are still falling, but this is now due to a reduction in the number of branches, aimed at streamlining the operation. At the half-way stage, divisional revenues dropped from £28.5m to £27.2m, but the number of operating branches is down to a more manageable 321 (from 336 in June 2013).

Importantly, there's hope on the horizon for the dry cleaning business. Management has no intention to exit that market altogether. Instead, JSG is pursuing new business opportunities outside of its traditional branches. For example, a new partnership with supermarket Waitrose will see dry cleaning services offered to shoppers at the retailer's customer service desks.

The combination of self-help, acquisitions and investment in growth is working well for Johnson Service and there is plenty of scope for more of the same in the future. This has the potential to fuel broker upgrades, with management already stating at the half-year stage that full-year profits are likely to be ahead of current forecasts. And with further good news comes the prospect that the shares could re-rate from the current unchallenging earnings multiple of just 11 times 2015 forecasts.