Johnson Service Group’s (JSG) shares are yet to reflect the success of attempts to refocus the business, which are raising sales and margins, and prompting forecast upgrades. Since selling its struggling dry-cleaning business just over a year ago, Johnson Service is focused on its Horeca business, which provides textiles such as linens to hotels, restaurants and catering companies, and its workwear business, which provides protective wear and workplace hygiene services. The sectors may be unassuming, but the group’s strong brands and size give it a great opportunity to grow. Textile rental is also very fragmented, offering plenty of scope for acquisitions.
Cheap relative to peers
Recent analyst upgrades
Falling net debt
Refocusing on higher-margin work
Pension deficit
UK-focused
The new focus is paying off, which is reflected in a string of broker upgrades over the past year (see chart, top right), most recently fuelled by strong full-year results and before that by a January trading update, in which the group announced it would beat expectations in its 2017 results.
In the 2017 financial year sales rose 13.3 per cent, while adjusted operating margins were up from 14.7 per cent to 14.9 per cent and adjusted earnings per share up 14.5 per cent. Acquisitions made a strong contribution to the progress, but organic sales growth was also impressive in its own right at 5.1 per cent, which chief executive Chris Sander said was split closely between volume and price.
Now the focus is on improving geographical coverage, especially for Horeca, which accounted for 58 per cent of last year's sales. It made two major acquisitions in 2017. In July last year it bought Professional Linen Services, an Edinburgh-based linen company, which expanded its coverage in Scotland and north-east England. In December, it acquired StarCounty, which has expanded its coverage in the north-west and the West Midlands, while further strengthening Johnson's Stalbridge brand. Management does not have a stated target for the amount it is looking to spend on future acquisitions. But with the balance sheet looking in good shape, opportunities are actively being sought. Management estimates the total market value of the hotel, restaurant and catering linens market at £620m, indicating considerable potential upside for the Horeca division, which has revenues of £169m.
The workwear division has been performing strongly, with organic growth and efficiency savings helping operating margins increase from 16.9 per cent to 17.2 per cent last year. The business has proved adept at both pleasing existing customers – customer retention rates were 95.4 per cent over the year – and winning new ones. The group had a record year for new sales wins, with 15 per cent of the total value of new sales in the year coming from those who had not used a rental service before.
| JOHNSON SERVICE GROUP (JSG) | ||||
| ORD PRICE: | 137p | MARKET VALUE: | £501m | |
| TOUCH: | 136.2-136.8p | 12M HIGH / LOW: | 152p | 107p |
| FORWARD DIVIDEND YIELD: | 2.3% | FORWARD PE RATIO: | 15 | |
| NET ASSET VALUE: | 46p* | NET DEBT: | 54% | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
| 2015 | 234 | 25.2 | 6.3 | 2.1 |
| 2016 | 257 | 33.8 | 7.6 | 2.5 |
| 2017 | 291 | 39.7 | 8.7 | 2.8 |
| 2018** | 306 | 40.3 | 8.9 | 3.0 |
| 2019** | 317 | 42.4 | 9.3 | 3.1 |
| % change | +4 | +5 | +4 | +3 |
| Normal market size: | 3,000 | |||
| Matched bargain trading | ||||
| Beta: | 0.13 | |||
*Includes intangible assets of £164m, or 45p a share **Investec forecasts, adjusted PTP and EPS figures | ||||
