Johnson Service facing fresh challenges

As a Johnson Service Group (JSG) van sailed past the Investors' Chronicle office last week, it felt like the textile rental company was on the road to recovery. Demand is building after a difficult lockdown period and – in a sign of confidence – management reinstated dividends. The group has also announced a share buyback scheme of up to £27.5mn.

Why, then, did the shares drop by almost 10 per cent immediately after the results announcement? The answer likely relates to margins. Revenue is up 77 per cent year on year, and has comfortably overtaken pre-pandemic levels. Growth was driven by the group’s hotel, restaurant and catering division (Horeca), which was all but wiped out during lockdown. However, Johnson Service’s adjusted operating profit reached just £12.8mn – 43 per cent lower than in 2019.

The cost of gas, electricity and diesel is proving troublesome – particularly when it comes to laundering hotel linen. Energy costs for the first half of 2022 were “significantly higher” than the equivalent period in 2019, representing 9.3 per cent of revenue, as opposed to 6.5 per cent. Competition for new employees also “continues to be a challenge” and staff costs now represent about 48 per cent of total sales, compared with 43 per cent in 2019.  

Looking forward, chief executive Peter Egan warned of “some margin pressure in the short term, particularly in respect of energy costs”. However, the group is in a better position than some: in the third quarter this year, 80 per cent of its anticipated electricity usage and 90 per cent of its anticipated gas usage is fixed at prices “significantly below” current day rates. In the fourth quarter, this rises to 100 per cent and 95 per cent, respectively.

As such, trading is expected to remain in line with expectations. (According to consensus estimates, analysts think profit before tax will reach £37.4mn in 2022, while EPS is expected to climb to 7.4p.)

The impact of inflation is clearly being felt, however. Johnson Service’s workwear division – which provides workwear rental, protective wear and laundry services to companies – recorded revenue growth of 2.3 per cent. Buy its operating margin shrunk from 18 per cent to 15 per cent, resulting in a dip in profits. Management said the margin had been impacted by a lag in price increases, and that further pricing discussions are ongoing.

It is also worth keeping an eye on demand, however. While the Horeca division is recovering well – second-quarter volumes reached 91 per cent of 2019 levels – the group noted lower volumes in hotel linen, as hotels are changing the bedding and towels less frequently. Meanwhile, workwear customer numbers are proving resilient but there has been a “small contraction” in the number of products being rented. 

Johnson Service is known for its resilient business model and slow-and-steady growth. This shows little sign of changing, but inflationary pressures could prove punishing in the short term. Hold. 

Last IC View: Hold, 120p, 8 Mar 2022