Tuesday, 8 March 2011

Solid Progress at Johnson

Johnson Services Group plc (JSG) announced its results for the year to 31 December 2010 this morning. I last looked at the Company in December 2010 and decided to continue holding.

The ordinary shares are currently trading at 33.75p, giving the Company a market value of £84m (8 March 2011).

On the face of it, the results seem positive with increased Adjusted Operating profit (+5%), EPS (+20%) and DPS (+9%); good cash flow generation and lower levels of net debt (from £68m at Dec 09 to £60m).

However, revenue was flat (snow and tough trading conditions) and there was £8m of Exceptional costs, mostly in relation to closing 20 loss-making dry-cleaning stores (lease commitments and redundancies)

Rules Refresh

1 - Assets - NAV has hardly budged from last year, remaining at £71m. The shares are now trading a slight premium (12%) to Net Assets given that the share price has edged up from 30p since my December review.

On the plus-side, the pension deficit has reduced from £15m to £12m, and there was a tax rebate of £6m received in February 2011 - ie after the year-end.

3 - Cash Flow - (a) net current liabilities increased from £9m to £15m, with trade creditors being stretched; (b) operating cash was £34m (EBITDA after working capital movements and pension scheme payments). Out of this, the Company needs to cover interest (£4m), replacement capex (£12m - guess), tax (£1m), dividends (£2m) and debt repayments (£6m due in next 12 months). This leaves £9m "spare" and together with the £6m tax cash, covers the trade creditors. The Company appears to be generating enough cash to meets its short-term needs at least.

4 - Debt - (a) debt:equity ratio has fallen from 0.95 to 0.85, which is encouraging, even if higher than I would ideally like; (b) EV/EBITDA ratio has crept up to 7x, which is pricey. However, if Exceptionals are removed, the Adjusted EV/EBITDA ratio is 5x, which is acceptable. Since the year-end, the Company has agreed to acclerate payment of the June instalment and has reduced the overall level of facilities available, which has led to a slight reduction in the future cost.

5 - PER - the 2010 EPS is 1.2p, resulting in a PER of 28x! Stripping out the Exceptionals and the underlying EPS was 4.1p, equating to a PER of 8x.

6 - Yield - 2010 DPS of 0.82p, represents a yield of 2.4% at the current price. As mentioned in my previous post, I cannot see stellar dividend growth in the short-term.

7 - ROE was only 5% due to the Exceptionals, which if removed, results in a ROE closer to 15% as in the prior year.


JSG appears to be making steady progress and is heading in the right direction. Trading conditions remain challenging, but the Company benefits from having a diversified business model with the majority of income coming from corporate customers. Cash generation is good, the debt is decreasing and the dividend increasing. The Exceptional items are slightly disappointing, especially as they are substantially cash items, but if it means spending a sum of money now to remove loss-making stores, it should be positive for earnings in the long-run.

I am going to HOLD and maintain my price target of 42p, representing a ball-park EPS of 4 to 4.5p and a PER of 9-10x.


  1. Good honest and detailed review. Very useful, thank you.

  2. Interesting review. The mix of the drycleaning with the textile rental seems pretty interesting. To me that is potentially a massive competitive advantage. However, the Facilities Management stuff seems a bit more questionable. I remember doing some research on companies like Interserve as it seems FM business gets locked down by companies like them...although it seems that is somehow linked to the Drycleaning business as well...as you've done more research i'd be interested to hear what you think?

  3. Hi CR

    Looking at Note 2 of the Final Results, the segmental analysis shows:

    Textile Rental - 50% of turnover, 75% of Adjusted Op Profit (before group costs) and ROCE of 46%

    Drycleaning - 33% of t/o, 9% Adj Op Profit and ROCE of 17%

    FM - 17% of t/o, 16% Adj Op Profit and ROCE of 144%

    Which supports the view that Textiles is the jewel in the crown.

    I am a bit more circumspect about FM. On the plus-side, the Company is buying long-term contracts and revenues(via PFI), which seem to be generating profits (and presumably cash - although no disclosure of segmental cash flows that I can see) and they may have bought some of these contracts at a good price - eg from the adminsitration of Jarvis.

    I think that most of these contracts relate to quite broad FM services - eg property management - so there is a risk that they are dabbling in areas outside of their expertise. To mitigate this, they are buying the 'people' that come with the contracts too.

    I see the FM side as being more opportunistic - ie buying future cash flow at a discounted price - but if this starts to account for significant proprtion of the business as whole (say >25% of turnover), I'll take a closer interest.