I think the UK’s largest textile rental company, Johnson Service Group (LSE: JSG), is an interesting investment proposition right now.
The firm rents out workwear and protective wear, and provides laundry and linen hire services for the hotel, catering and hospitality markets through its Apparelmaster, Stalbridge Linen Services, Bourne Textile Services, London Linen and Afonwen brands. Much market-share growth came by buying up regional textile-related businesses, and over recent years the company sold off non-core assets – such as its interests in the dry-cleaning sector – to pay down debt and to focus on the core textile rental business.
Robust cash inflow
The most recent balance sheet for 30 June shows borrowings running just over three times the level of last year’s operating profit, which seems comfortable given the big defensive element inherent in the firm’ operations. The company derives its income from multiple smaller payments from its many customers, typically on a monthly basis. The firm’s services are essential to the smooth operation of many businesses and that happy situation leads to robust cash generation for Johnson Service. The company has a good record of steady inflows of cash that support profits well.
Over the past five years or so the share price has been moving up in a 2 o’clock direction to reflect ongoing operational progress. In early September interim results, the firm reported revenue up just over 19% compared to the year before and adjusted fully diluted earnings per share put on 16%. The directors marked the occasion by pushing the dividend 12.5% higher. The directors reckon the firm’s success during the period came from organic growth of 4.8% and from the benefits of recent acquisitions.
Ahead of expectations
Chief executive Chris Sander reckons continual capital investment is driving operational efficiencies and the firm is well-positioned to benefit from ongoing opportunities in the sector. He’s expecting the second half of 2017 to deliver good results too, and thinks the full-year outcome will be ahead of the directors’ previous expectations.
Over the last five years, the firm has emerged as a much tighter outfit focused on textile rental activities. In January, the sale of the remaining dry-cleaning business completed the company’s rebirth, and I reckon the future looks bright because a concentrated focus on a narrower sphere of activity is almost always a good thing when it comes to business. Trying to be all things to everyone rarely succeeds in generating slick finances because additional costs and inefficiencies often get in the way.
Consolidating the sector
The company says its acquisition and integration strategy as well as ongoing investment are key to future growth. The strategy has served the firm well, so far, and along with strong organic growth has put it at the top of the market in Britain. I’m optimistic that future progress will be made and that investors like us can benefit further from where we are now.
Today’s share price at around 144p puts the firm on a forward price-to-earnings ratio just below 17 for 2018 and the forward dividend yield runs at a little over 2%. Forward earnings should cover the payout almost three times. The valuation isn’t in obvious-bargain territory but I reckon it does reflect the quality of the enterprise.
