Evolving Weather Trends Will Depress Restoration And Insurance Margins

Key Takeaways

• Increased climate resilience and evolving construction technologies threaten the company's traditional revenue streams and long-term competitive advantage.
  
• Inflation, labor shortages, and stricter regulations are likely to compress margins and undermine sustained profitability.
  
• Tailwinds from extreme weather, operational recovery, recurring contract wins, U.S. momentum, and cost efficiencies underpin resilient earnings, margin growth, and revenue diversification.

Catalysts

Provides integrated building services in Australia, New Zealand, and the United States.

• With climate adaptation policies accelerating and infrastructure becoming more resilient, the frequency and severity of insurable extreme weather events may decline, leading to structurally lower insurance claim volumes and ultimately reducing Johns Lyng Group's long-term revenue base and growth prospects.
  
• Inflationary pressures and persistently high interest rates are expected to suppress consumer spending and dampen property development, resulting in weaker demand in the building, restoration, and strata sectors that drive the company's revenues and margins.
  
• The group's ongoing dependence on major insurance-related weather events means that in periods of benign or predictable weather patterns-as seen recently-the company faces revenue and margin contraction, exposing a core vulnerability that may become more pronounced as climate resilience improves.
  
• Rapid advances in construction technologies, such as modular methods, automation, and AI-enabled maintenance, are likely to erode traditional restoration and contracting market share if Johns Lyng is slow to adapt, resulting in diminished competitive advantage and compressing future earnings.
  
• Ongoing labor shortages, wage inflation, and more stringent environmental regulations across the construction sector will continually raise project costs, pressure margins, and increase compliance overhead, leading to sustained deterioration in long-term profitability.

Johns Lyng Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Johns Lyng Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Johns Lyng Group's revenue will grow by 6.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.5% today to 4.9% in 3 years time.
• The bearish analysts expect earnings to reach A$65.8 million (and earnings per share of A$0.23) by about July 2028, up from A$39.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.5x on those 2028 earnings, down from 28.4x today. This future PE is lower than the current PE for the AU Construction industry at 17.7x.
• Analysts expect the number of shares outstanding to grow by 1.04% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.98%, as per the Simply Wall St company report.

Johns Lyng Group Future Earnings Per Share Growth

Risks

• Secular trends such as increasing frequency and severity of extreme weather events are likely to drive long-term growth in insurance-related repairs and restoration, and recent post-period storm and flood activity in Australia, as well as wildfires in California, are already fueling a rebound in registrations, which will positively impact revenues.
  
• The business has demonstrated resilience and ability to recover from short-term setbacks, with operational issues in New South Wales now resolved, relationships with key insurance clients reinstated, and business registrations surging 50 percent above first-half levels, all of which are set to restore lost revenue and improve margins over the medium term.
  
• Multiple large, multi-year contract wins and extensions with major clients (including Aidacare and TIO) and increased penetration in strata management, boosted by acquisitions, have strengthened a pipeline of recurring, predictable revenue streams, supporting strong and stable future earnings growth.
  
• The company's U.S. expansion is gaining momentum, with positive early results from the Brown & Brown insurance broker partnership and a scalable Emergency Broker Response product unique in the U.S. market, pointing to substantial new job volumes and diversification of the revenue base beyond Australia.
  
• Structural cost reductions, improved operating leverage, and integration of recent acquisitions are set to expand group margins, with projected EBITDA margin growth in the second half of FY '25 and further room for efficiency improvements, likely enhancing future profitability and sustaining earnings growth.

Valuation

• The assumed bearish price target for Johns Lyng Group is A$2.6, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Johns Lyng Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$4.0, and the most bearish reporting a price target of just A$2.6.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$1.3 billion, earnings will come to A$65.8 million, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 8.0%.
• Given the current share price of A$3.91, the bearish analyst price target of A$2.6 is 50.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.