Johnson Service Group – a Christmas cracker

This group is a leader in its service sector and its shares deserve a premium rating. Its shares at 196p are undervalued, writes Mark Watson-Mitchell. 

Whether you were staying at a hotel over the Christmas period, or you were out dining in your favourite restaurant, there was a very high possibility that the Johnson Service Group (LON:JSG) had something to do with making it more enjoyable.

We all like to see crisp, white table linen and napkins at the dining table. We all love fluffy luxurious towelling and crisp, white cotton sheets on the beds in our rooms. And that is just where this group excels.

Or perhaps you have noticed that certain service personnel are wearing bespoke protective coveralls as they go about their work. Again, Johnson Service Group comes to the fore.

It provides textile rental and related services across a range of sectors throughout the UK. Through the Johnsons Apparelmaster brand, it is the leading supplier of work wear and protective wear in the UK. It processes over 1m garments each week.

The group also provides premium linen services for the hotel, catering and hospitality sectors, as well as high volume hotel linen services, through various of its brand names including Afonwen, Stalbridge Linen, Bourne Textile Services, PLS, South West Laundry, and London Linen.

The entire group employs over 5,000 people with operations covering the whole country – a national coverage with local service.

The group includes amongst its thousands of customers Accor Hotels, Caprice Restaurants, Copthorne Hotels, Cote Brasserie, Crowne Plaza, DoubleTree, Holiday Inn, the House of Commons, Hovis Bakery, Malmaison, Morrisons, Premier Inn, Princes Foods, Sodexo, Warburtons and Weetabix – so now you get a flavour of what it does and for whom.

In early September the company announced its interims to end June – they showed continued organic growth with revenue up 9.8% at £167.1m and adjusted pre-tax profits of £20.1m, up 10.4%. At that time the company stated that the full-year results are expected to be slightly ahead of market expectations.

“There is good momentum in the group and we have started the second half strongly” was the clear statement at the time.

Well, we will find out just how well the group has been doing in the final half-year in the next two to three weeks when they declare the end of year trading update.

Market estimates suggest the current year will see revenue up from £321m in 2018 to £347m for 2019, with pre-tax profits leaping from £33m to £37m, and earnings of 8.1p per share, more than twice covering a 3.4p dividend.

For 2020 another revenue hike to £362m could see profits of £39m, worth 8.7p per share in earnings and a 3.6p dividend.

Into 2021 £380m of sales could see £41.5m profits, earnings of 9.25p and a 3.9p dividend per share.

With 370m shares in issue the group is valued at around £725m.

Large holders include PrimeStone Capital (13.00%), Henderson Global (5.10%), Octopus (5.02%), Merian Global (4.98%), Invesco (4.90%), BlackRock (4.89%), Investec (4.58%), Schroder (3.68%), Legal & General (3.52%0, and Polar Capital (3.33%).

This group is a leader in its service sector and its shares deserve a premium rating. Its shares at 196p are undervalued. I now set an end-2020 target price of 250p.