Acquisition Of Empire Linen Services And Crawley Site Opening Will Improve Future Operations

Key Takeaways

• Acquiring Empire Linen Services and the new Crawley site are expected to enhance earnings and improve operational efficiencies and net margins.
  
• Investments in automation and energy cost management are projected to increase production capacity and improve operating margins through reduced costs.
  
• Rising energy and labor costs, along with flat market growth and significant investments, could pressure Johnson Service Group's margins and cash flow.

Catalysts

Provides textile rental and related services in the United Kingdom and Ireland.

• The acquisition of Empire Linen Services is expected to be immediately earnings enhancing by expanding into the luxury 4 and 5-star hotel market and leveraging synergies with the existing Regency business. This is likely to positively impact revenue and operating margins.
  
• The opening of the new Crawley site is anticipated to increase operational efficiencies and drive production capacity, which could improve net margins and earnings through economies of scale and enhanced service offerings.
  
• Continued investment in automation, especially in high-volume food processing plants, is expected to improve efficiency and production capacity, thereby potentially increasing net margins due to reduced labor costs and increased throughput.
  
• Strong organic growth in the HORECA segment, driven by a robust sales pipeline and increased volumes, suggests potential future revenue growth as demand from the hospitality sector remains strong.
  
• Improvements in energy cost management, alongside strategic investments in sustainability and efficiency, are projected to contribute to improved operating margins by reducing operational costs as a percentage of revenue.

Johnson Service Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Johnson Service Group's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.3% today to 10.3% in 3 years time.
• Analysts expect earnings to reach £60.3 million (and earnings per share of £0.13) by about February 2028, up from £31.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.0x on those 2028 earnings, down from 18.2x today. This future PE is lower than the current PE for the GB Commercial Services industry at 25.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.2%, as per the Simply Wall St company report.

Johnson Service Group Future Earnings Per Share Growth

Risks

• Energy unit prices, although gradually falling, remain significantly higher than historical levels, which could pressure net margins in the long term if they do not decrease further.
  
• Labor costs are a major component of costs, and while steady currently, any substantial rise in these could impact overall net margins.
  
• The company has significant investment and outflows related to acquisitions and plant upgrades, such as the £27 million spent on acquisitions in the first half of 2024, which could weigh on cash flow or increase net debt levels if not offset by corresponding revenue growth.
  
• The Workwear market is described as tough, with revenue and EBITDA flat compared to 2023, indicating limited growth that could constrain overall earnings.
  
• The company anticipates the living wage increases some to be lower than previous years, but if national wage growth remains high, it could impact future earnings by increasing operational costs.

Valuation

• The analysts have a consensus price target of £1.9 for Johnson Service Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £2.2, and the most bearish reporting a price target of just £1.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £587.6 million, earnings will come to £60.3 million, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of £1.36, the analyst price target of £1.9 is 28.2% higher.
  
• 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.