Johnson Service looks fresh for 2020

Providing linen to hotels, restaurants and caterers, the ‘Horeca’ division accounts for the majority of the group’s revenue (61 per cent) and adjusted operating profit (59 per cent). Sales increased by 12 per cent to £100m in the first half of 2019 with 8 per cent organic growth driven by new hotel signings and new locations being added to current customer contracts. Adjusted for a benefit from new accounting rules, operating profit increased by 11 per cent to £12.6m. The operating margin was 13 per cent. The group expects some margin erosion in 2020 as a new high-volume linen plant in Leeds comes on stream. With a capital expenditure cost of £10m (of which £3m will be spent in 2019), the 45,000 square feet facility is expected to open ahead of schedule in the second quarter of 2020. This will increase hotel linen capacity by up to a fifth and provide efficiency and logistical benefits, which could be the source of future upgrades. Half the plant’s capacity will be filled by transferring work from existing sites, freeing up space in those facilities to service new customers.

Meanwhile, the workwear business generated £67.5m of revenue in the first half of the year, fuelled solely by 6.8 per cent organic growth. Maintaining a 95 per cent retention rate, the division increased sales to existing customers, renewing agreements with several national accounts. Johnson chooses to compete on service quality rather than price and has previously seen large customers return after trialling cheaper competitors. A fifth of new business won during the period came from customers entering the workwear rental market for the first time. Adjusted for the accounting change, underlying operating profit increased by 9 per cent to £11.8m and a focus on efficiency improved the margin by 0.4 percentage points to 17.5 per cent.

Acquisitions remain a key part of Johnson’s strategy to expand its national footprint and achieve local economies of scale. Being able to offer a UK-wide service allows the group to secure larger, national contracts. Centred around independent, often family-owned businesses as well as bundles of contracts, the number of acquisitions opportunities appearing at any one time can be irregular, but the fragmented structure across both markets plays into the hands of a consolidator.

The bulk of capital expenditure is typically directed towards purchasing new rental stock, but the group also invests in increasing capacity and productivity across its estate to support further organic growth. Spending £9.3m on equipment in the six months to 30 June, a similar level of investment is expected in the second half in addition to expenditure on the Leeds plant. The ability to invest in capacity and ever-more efficient machinery places pressure on smaller industry players, but does mean net debt stood at £92.6m (excluding £43.8m in lease liabilities) in the first half of the year – although this is 6 per cent lower than the 2018 year-end. Johnson remains cash generative, with first-half net cash from operations (after both tax and interest) up 29 per cent to £47.9m.

Given the sectors it services and its large fixed cost base, Johnson does have cyclical vulnerability. However, a focus on its customers' unavoidable day-to-day costs helps limit these risks. Johnson was relatively resilient during the last recession, with textile rental revenue (Horeca and workwear combined) only falling by 9.4 per cent between 2007 and 2009, around half of which related to a decision to ditch an unprofitable contract.