Johnson Service's riches from rags story

With 2014's £27m acquisition of Bourne Services having bedded into Johnson's operations well, we believe that the market will be keen to assess the impact on the first half of 2016 from last year's acquisitions of London Linen for £65m and Lincolnshire-based Ashbon Services for £6m, as well as January's £18m purchase of Zip. There are solid grounds for optimism.

The new acquisitions have bolstered Johnson's hotel and catering business that form part of the textile rental division, which generated four-fifths of group turnover last year and 94 per cent of profit. The hotel and catering linen rental market is fragmented and Johnson currently only has about 18 per cent of it. However, were it able to grow its market share to match the 45 per cent boasted by the textile rental's other major business, workwear, broker Whitman Howard calculates that turnover could be lifted by £148m and, assuming margins remain at about 15 per cent, operating profit could rise by £22m compared with £27.9 from the group as a whole in 2015.

Johnson should have the fire-power from its £100m loan facility to continue buying businesses in this area. Whitman forecasts that without further deals net debt should fall from £71m at the end of last year to £58m at the end of 2018 (this should be seen in the context of a £13m pension deficit and operating lease commitments of £69m at the 2015 year-end). What's more, Johnson has had no trouble raising funds for acquisitions by issuing new shares. It raised money at 51p to fund the Bourne purchase and at 73p for London Linen.

Meanwhile, progress at the rest of Johnson's business looks encouraging. While acquisitions have been a driving force, organic growth last year was an encouraging 4.1 per cent for the group and textile rental operating margins firmed from 15.4 per cent to 15.6 per cent, which helped turn a 21 per cent increase in sales to £188m into a 24 per cent increase in profit to £29.4m.

What's more, while conditions look tough at the dry-cleaning business, which includes brands Johnson Cleaners and Jeeves of Belgravia, the division looks in better shape following a £6.5m restructuring. Last year, 101 branches were closed while a partnership with Waitrose was rolled out to 65 new locations, taking the total to 143. In all, while dry-cleaning turnover fell 16 per cent to £46m last year, the division's profit increased from £1.6m to £2m.