Johnson Service facing new challenges

  • Dividend and share buybacks announced
  • Margins under pressure

Like a Johnson Service Group (JSG) van drove past the FT office yesterday, I had the impression that the textile rental business was on the road to recovery. Demand is strengthening after a difficult lockdown period and today – in a sign of confidence – management restored dividends. The group also announced a share buyback program of up to £27.5 million.

Why, then, did stocks fall nearly 10% immediately after the earnings announcement? The answer seems to relate to the margins. Revenue was up 77% year over year and well above pre-pandemic levels. Growth was driven by the group’s hospitality and catering (Horeca) division, which was virtually wiped out during the lockdown. However, Johnson Service’s adjusted operating profit was just £12.8m, 43% lower than in 2019.

The cost of gas, electricity and diesel proves problematic, especially when it comes to laundering hotel laundry. Energy costs in the first half of 2022 were “significantly higher” than in the equivalent period of 2019, representing 9.3% of revenues, compared to 6.5%. Competition to recruit new employees also “continues to be a challenge” and personnel costs now represent around 48% of total sales, compared to 43% in 2019.

Looking ahead, chief executive Peter Egan warned of “some pressure on margins in the short term, particularly with regard to energy costs”. However, the group is in a better position than some: in the third quarter of this year, 80% of its planned electricity consumption and 90% of its planned gas consumption are priced “significantly lower” than current tariffs. In the fourth quarter, this increases to 100% and 95%, respectively.

As such, trading should remain in line with expectations. (Based on consensus estimates, analysts believe pre-tax profit will hit £37.4m in 2022, while EPS is expected to climb to 7.4p.)

However, the impact of inflation is clearly being felt. Johnson Service’s workwear division, which offers workwear rental, protective clothing and laundry services to businesses, reported revenue growth of 2.3%. However, its operating margin fell from 18% to 15%, leading to lower profits. Management said margin was impacted by a delay in price increases and further pricing discussions were ongoing.

However, demand should also be monitored. While the Horeca division is recovering well – second quarter volumes reached 91% of 2019 levels – the group noted a decline in hotel linen volumes, with hotels changing bedding and towels less frequently. Meanwhile, the number of workwear customers held up, but there was a “slight contraction” in the number of rented products.

Johnson Service is known for its resilient business model and slow, steady growth. This shows few signs of changing, but inflationary pressures could prove to be a negative in the short term. Hold.

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

JOHNSON SERVICE (JSG)
ORDER PRICE: 91p MARKET VALUE: £405 million
TO TOUCH: 90.5-91.3p TOP OF 12 MONTHS: 167p LOW: 85p
DIVIDEND YIELD: 0.9% P/E RATIO: 16
NET ASSET VALUE: 64p* NET DEBT: 20%
Half-year to June 30 Turnover (£million) Profit before tax (millions of pounds sterling) Earnings per share (p) Dividend per share (p)
2021 99.6 -13.9 -2.50 0.00
2022 176 5.10 1.50 0.80
% change +77
Ex div: October 6
Payment: November 4
*Includes intangibles of £148 million or 33 pence per share

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