Johnson Service cleans up

Providing premium linen to hotels, restaurants and caterers and serving the high-volume hotel market, ‘Horeca’ is Johnson's largest business division. Accounting for 60 per cent of group sales, revenue increased by 14.1 per cent to £192m in 2018 with 9.6 per cent underlying organic growth driven by new business wins, including a 92-site restaurant contract. A 1.3 percentage point squeeze on the operating margin to 14.6 per cent is attributed to the timing of acquisitions, given the seasonal nature of profits and a one-off high margin job last year.

Expected to become operational in the second quarter of 2020, a new £10m high-volume hotel linen facility in Leeds aims to support Horeca's growth. Alongside providing logistical benefits and improved efficiency, Barclays estimates it will increase linen capacity by 15 to 20 per cent. 

Meanwhile, in the higher-margin workwear business, volume efficiencies and better productivity offset wage increases last year. The operating margin increased by 0.4 percentage points to 17.6 per cent. This helped turn a 5.2 per cent increase in revenue to £129m into a 7.6 per cent increase in operating profit to £23m. Organic revenue growth of 5.2 per cent includes record new sales levels and some large customers returning after trialling cheaper competitors. With the existing customer satisfaction index reaching 86 per cent in 2018 and 95 per cent client retention, Johnson chooses to compete on service quality rather than price.

Acquisitions remain key to expanding the group’s geographical footprint and scale. Running separate plants for high-volume linen, low-volume linen and workwear allows Johnson to benefit from efficiencies that smaller, less specialised competitors struggle to match. Currently enjoying a 26 per cent share, the fragmented Horeca market offers most scope for consolidation. 

A 13 per cent increase in capital expenditure last year to £64.6m reflects £18.1m of planned investment across multiple sites to increase capacity and productivity and a net £46.7m spend on new rental stock. Together with acquisitions activity, this has pushed net debt up by 8 per cent to £98.4m. Pension liabilities totalling £212m require £1.9m in annual deficit recovery payments. Although the pension deficit stands at £4.6m, this represents a 62 per cent reduction from the prior year and RBC Capital Markets forecasts a surplus in 2021. Remaining highly cash generative, cash from operations before tax has increased by 7 per cent to £93.8m in 2018.