Johnson Services Group has now released their interim results for the year ending 2015.
Overall revenues increased when compared to the first half of last year as a £3.7M fall in dry cleaning revenue due to a reduced number of branches was more than offset by an £11.3M growth in textile rental revenue which included a two month contribution from London Linen. Depreciation of textile rental items increased by £1.7M and amortisation was £600K higher with other underlying operating costs some £3.9M higher. We also see a £6.2M charge relating to dry cleaning restructuring costs which meant that the operating profit was £4.9M below that of the first half of 2014. Finance costs, including notional interest on the pension liabilities, were slightly higher but tax was down by £1.1M so that the profit for the half-year came in a £700K, a decline of £4.1M year on year.
When compared to the end point of last year, total assets increased by £78.2M driven by a £34.9M increase in goodwill, a £24.8M growth in other intangible assets, a £9.4M increase in receivables, a £5.7M growth in property, plant and equipment, and a £5.3M increase in textile rental items, partially offset by a £2.2M fall in non-current receivables and a £1.3M decline in deferred tax assets. Liabilities also increased during the period as a £44.8M growth in borrowings, a £9.5M increase in payables, a £5.2M increase in deferred tax liabilities and a £1.4M growth in provisions were partially offset by a £3.1M fall in pension obligations. The end result is a net tangible asset level of -27.1M, an adverse movement of £39.2M when compared to the end point of last year, which is looking a little stretched to me.
Before movements in working capital, cash profits increased by £200K to £20.7M and after a fairly large increase in payables, partially offset by a bit of a higher tax payment, the net cash from operations came in at £19.8M, an increase of £800K when compared to the first half of last year. The group then spent £3.7M on property, plant and equipment along with £12.8M on the purchase of textile rental items which, along with a £1M receipt from special charges gave a free cash flow of £4.3M, which just about covers the finance lease payments and dividends. Clearly it does not leave any cash for acquisitions so the net £65.5M spent on acquisitions had to be paid for by new borrowings, which increased by £46M, and the issue of new shares which brought in £21.2M. The end result is a cash inflow of £2.4M and an end of period cash level of -£2.5M.
Underlying operating profit at the textile rental division was £12.4M, an increase of £1.6M year on year, helped by the addition of the London Linen Business and a full six months of trading from Bourne.
Apparelmaster had a solid first half performance with sales to both new and existing customers being positive, despite the challenges of competitive market conditions. This, along with the renewal of a number of national accounts, has resulted in increased investment in rental stock. The business strategy to improve customer service and streamline customer invoicing is being well received. As part of the ongoing investment in the workwear facilities, the new £8.5M facility in Leeds is now fully operational, delivering good levels of efficiency and quality combined with lower energy consumption. The new facility has significantly increased the garment processing capacity for the business in the North of England and will enable delivery efficiencies to be realised in the area. Further capital investment has been completed at the Perth facility where a substantial extension to the building, along with additional washing and finishing equipment, has been added to accommodate further growth.
Stalbridge returned a strong performance in the first half with improved customer retention and new sales driving revenue growth. Lower central overheads and improved productivity have led to an enhanced margin and tighter controls on linen stock spend and management are improving linen utilisation. A new marketing campaign was launched during the period and new sales materials have been developed to strengthen the sales and marketing process. There have also been investments in new machinery during the period which have provided improvements in throughput and product quality. New energy saving equipment has been installed in the Glasgow factory which has also been extended in size due to strong demand for the premium service in Scotland and the North East.
Stalbridge and London Linen are being integrated to streamline customer relationships and transport links with some previous London Linen customers being serviced from the Stalbridge facility in Glasgow. The customer extranet facility, which allows customers to access their account details on the internet, is proving very popular and further development work is underway to make it more interactive. At London Linen, trading in the first two months was in line with expectations and revenue increased compared to the same period last year. There are a number of capital investment programmes for the business that are currently under review and will commence towards the end of the year and into 2016.
Bourne has traded well in the face of recent volatile market conditions and some lost national contracts in the high volume UK hotel sector. While the sector has experienced a lower occupancy rate increase than in the previous year, the group has added a net 17 hotels to the business so far this year. The business has introduced photographic technology to automate the consistency of the finished linen. In conjunction with this investment is the introduction of a web ordering portal for customers combined with a paperless billing facility which has been very well received.
The underlying operating profit at the dry cleaning division was £500K, an increase of £100K when compared to the first half of last year. There were 210 branches and 128 Waitrose locations trading at the end of the period. The branch reorganisation is nearly complete, with the closure of 99 branches in a three month period, the total cost of which remains at £6.5M. The partnership with Waitrose seems to be going well, adding a further 50 locations in the period and it is anticipated that additional locations will be added throughout the rest of the year. They have continued to develop new routes to reach their customers at their place of work and through the online model which includes the launch of Johnson’s Bridal and localised online service for the cleaning of household goods.
There were a number of “exceptional items” listed in the results. These include restructuring costs in the textile rental division relating to a new processing facility that has been constructed to replace an existing site in Leeds. The total cost of the relocation, excluding the capital investment, is expected to be £2.3M, of which £1.3M was incurred last year (£800K during the first half). In the first half of this year, £600K has been charged with the remaining £400K being charged in the second half relating to the decommissioning of the old site. Another item is the restructuring of the dry cleaning business relating to the closure of various uneconomic branches, 99 of which were closed during the first half of the year. The estimated charge to the income statement is about £6.5M, of which £6.2M was recognised during the period and the remaining £300K will be recognised during the second half of the year. Finally, during the period, professional fees of £500K and stamp duty of £300K was paid relating to the acquisition of London Linen Supply Ltd. Whether to include these costs in the underlying figures is a matter of debate. The dry cleaning restructuring certainly looks like one-off charges but the costs for the closure of the old textile rental facility could be considered ongoing costs relating to the business and the costs relating to the acquisition could certainly be considered ongoing given the buy and build strategy in my view.
As the end of the half, the group had committed orders for capital expenditure of £800K, much less than the £5.5M at the same point of last year, presumably as the new textile rental facility in Leeds is now broadly completed.
In April, the group acquired London Linen Supply for a net consideration of £64.9M plus fees. The group came with intangible assets of £26.1M, including a huge £25.5M for customer lists; along with £34.9M of goodwill. Since acquisition, the business generated a profit of £700K for the two month period and had it been acquired at the start of the year, it would have provided profits of £2M. Although this is clearly an earnings enhancing acquisition, the price paid looks rather high to me despite the fact that it strengthens the group’s presence in the restaurant and catering linen market. The directors are apparently seeking further acquisitions in the wider textile rental market which strikes me as rather dangerous given the amount of debt here.
The group has a committed facility comprising a £100M rolling credit facility which runs to April 2020 and a £20M short term facility expiring in April 2016. They have partially hedged its exposure to rises in interest rates. Until the start of 2016, LIBOR is replaced with a fixed rate of 1.79% over £20M of borrowings and thereafter LIBOR is replaced with a fixed rate of 1.4725% over £15M of borrowings until the start of 2019 and LIBOR is replaced with a fixed rate of 1.665% over a further £15M until the start of 2020.
The pension plan continues to be a burden on the group. During the period they paid £1M as part of the deficit recovery programme with another £900K due in the second half of the year. Following discussions with the actuary, a re-measurement gain of £2.3M was recorded as a loss on the return of assets of £3M was offset by a £5.3M financial assumptions gain on the liabilities relating to an increase in corporate bond yields. The scheme was closed to future accrual at the end of last year which will help but the deficit still stands at £15.4M.
It is worth noting that as a condition of the sale of the facilities management division in 2013, the company put in place indemnities to the purchaser in relation to any future amounts payable in respect of contingent consideration relating to the Nickelby acquisition completed in 2012. The maximum amount payable under the terms of the indemnity could be up to £5M but the directors believe that the risk of settlement at or near the maximum level is remote.
Going forward, the board expect further progress in the second half of the year and expect the full year result to be slightly ahead of current market expectations.
After a 30% increase in the interim dividend, at the current share price, the shares trade on a dividend yield of 2% but I can’t find a prediction for the full year. The net debt currently stands at £72.4M compared to £28.5M at the end of the year which seems a bit stretching for a company of this size.
So, this was a fairly solid set of results for the group. Profits were below those of last year but if we take out the dry cleaning restructuring costs, underlying profits did improve. Operating cash flow also improved year on year with an OK level of free cash before the acquisition. The problem, though, in my view is the balance sheet. Net tangible assets fell considerably and were heavily negative as the group strains under the burden of a lot of debt and pension obligations. Operationally, it is quite difficult to analyse performance as no like for like figures are given so I assume LFL profits at the textile rental are probably down year on year, perhaps influenced by the competitive environment for Apparelmaster and the difficult end market for Bourne. The dry cleaning performance was fairly solid and I do really like the initiative with Waitrose which seems to be going quire well.
The dividend yield of 2% is OK but the real problem for me here is the amount of debt. Of course as long as things continue to go well, this is not a problem but if the recent wobbles in the economy expand then it could become a real issue. It also concerns me that management are looking to potentially make even more acquisitions when I feel they would be much better placed allowing the recent ones to bed in and build up their reserves a bit. All in all, this is not for me at the moment despite the good share price performance:
On the 30th November the group announced the acquisition of Ashbon Services, a specialist linen hire and laundry business based in Lincolnshire, for a cash consideration of £6.25M. The business serves the catering, hotel and leisure industries from its processing plant in Grantham and is expected to be immediately earnings enhancing with revenues of £4.5M last year.
On the 1st December it was announced that CFO Yvonne Monaghan and her husband sold 200K shares at a value of £176K. After this transaction, she still holds 564,086 shares in the company. This is quite a heft sale and I kind of agree with her. The debt at this company is currently too much considering its negative tangible book value in my opinion and I will not be covering it going forward unless that situation changes.