Profits surge at JSG

Laundry is not glamorous, but it is necessary. As such, Johnson Service Group (JSG), which provides linen services for the hospitality sector and rents out work uniforms, should benefit from steady sales and predictable profits. Since the pandemic and the invasion of Ukraine, however, the Aim-traded group has faced fluctuations in demand and surging costs. 

The turbulence finally seems to be easing. In the first half of 2023, adjusted operating profits jumped by 48 per cent to £19mn as a result of “strong and more predictable” linen volumes and chunky price hikes, which offset “some volume attrition” in the workwear division. Organic revenue growth reached an impressive 20.6 per cent.

This figure is flattered by Covid-19, however, which still weighed on demand in the first half of 2022, and it is important to note that profitability is still a way off pre-pandemic levels. JSG’s adjusted operating profit margin was 7.5 per cent in the period, down from 13.5 in the first half of 2019, meaning profits remained £3.6mn lower than past highs.

The reasons for this are not surprising. Labour costs represent 45.1 per cent of revenue in the period, up from 43.2 per cent in the six months to 30 June 2019. This is down from 47.5 per cent last year, however, and management said it was “encouraged by the improving efficiency as volumes continue to return and, accordingly, expect labour, as a percentage of revenue, to reduce even further by the end of the year”.

The bigger problem lies elsewhere. Laundry is an energy intensive business and gas, electricity and diesel costs were “volatile” in the period. Although energy unit prices have gradually fallen, they are still higher than they were historically, representing 10.3 per cent of revenue, down from 6.5 per cent in 2019.

Management believes that JSG’s operating margin will return to historic levels in the “medium term”, but has not set an exact date. It is making obvious progress elsewhere, though, returning plenty of cash to shareholders and extending its reach with the acquisition of Celtic Linen – its first major move into healthcare. It has also upped its forecasts slightly for the full year. 

However, we remain nervous about JSG’s exposure to energy prices and the lack of volume growth in its workwear division. Hold.

Last IC View: Hold, 115p, 7 Mar 2023