BUY HOLD SELL – Johns Lyng Group (ASX: JLG)
Johns Lyng Group (JLG) is a building services company that specialises in emergency construction works. Its core business centres around restoration of properties that have been damaged by insured events like floods and fire. Its client base is made up of insurance companies, local and state governments, and retail customers.
Most (80%) of JLGs revenue comes from its insurance, building, and restoration services. The other 20% is derived from its commercial building segment. EBITDA guidance was upgraded in June on the back of robust demand for the group’s core services, and a significant increase in catastrophe (CAT) recovery activity during FY21, primarily in northern NSW and southeast Queensland. Forecast revenue lifted to $558.2m, representing a 6.5% increase on earlier guidance provided in February.
Since the 1970’s the cost of natural disasters in Australia has more than doubled. Partly a function of population growth and lifestyle but predominantly due to our changing climate. Hotter and drier climates are developing in some parts of the country, juxtaposing intensifying rainfall patterns in other regions. In the decade to 2019, the cost of natural disasters rose to $35bn, with one climate council report calculating it could eventually cost the Australian economy $100 billion every year. While that is arguably an estimate searching for a headline, it does underscore an inalienable trend. A trend that JLG is tied to.
CEO Scott Didler recently touted JLG’s ability to respond quickly to natural disasters, citing a national network of more than 6000 trades and contractors. “We’re well placed to scale up quickly and get all hands-on deck when disasters strike.” On the topic of scale, in early July JLG moved to strengthen its position in the strata and building management sector through three strategic acquisitions costing $8m, which were expected to be immediately earnings accretive. JLG recently won a $55m contract from the Victorian government for the clean-up and make-safe works on private properties damaged by Victoria’s storms.
- ROE is impressive at 33%. It is expected to edge slightly lower in FY22 and FY23.
- The dynamic between revenue and EPS growth is favourable with EPS growth anticipated to outstretch revenue growth, an indication of business efficiency. In FY21, EPS growth is expected to be 30% – well ahead of forecast revenue growth of 19%
- JLG sits on a PE of 53.7x, peers in CSR and FBU sit on 16x and 16.8x respectively so you are paying a premium for earnings. It is expected to get progressively ‘cheaper’ in future periods.
- 80% of the brokers surveyed by Thomson Reuters have a BUY or STRONG BUY rating.
- It is trading at a 9.5% premium to the average broker target price and the intrinsic value sits 58.1% below the current price.
WHAT SORT OF INVESTMENT IS JLG?
JLG is a growth company with a strong balance sheet and ample liquidity. It started FY21 with a strong work-in-hand pipeline, winning Westpac, Chubb and RACQ contracts. It is targeting ‘defensive’ growth via geographical expansion, contract wins, and diversification into complementary offerings in the restoration/construction sphere with multiple cross-sell opportunities per dwelling. Management has also outlined ambitions for deeper expansion into the US in due course. The main limitation is that JLG’s services aren’t part of discretionary spending for consumers. Its earnings rely heavily on extreme weather events which leave it exposed to lumpy revenues. That said, the variability and frequency of severe weather events do appear to be in its favour. QBE in its latest update affirmed that view, noting significantly higher than normal catastrophic events around the world. QBE’s costs blew out ahead of its allowance as a result. While a melancholy outcome for the people and families implicated in those numbers, it emphasises JLG’s essential work and market position.
Little broker interest at the moment. Canaccord Genuity downgraded to HOLD from buy on July 6, on valuation grounds. The target price was increased 12%, to 505c, which could be interpreted as a somewhat bullish assessment.
Not much needs to be said here, as the picture tells the story. Bottom left to top right, it's what any trend trader would want to see. Average volume has been rising through the most recent part of the rally, whilst the RSI is not overbought. Perhaps most importantly, pullbacks have continued to be met with new buying interest – a very healthy sign for a stock that has been in an uptrend for some time now. Faces a bit of a challenge at the 500c round number but, if it can clear that level with some conviction, it could be off to the races once again.
Scott Didier sold ~5% of his holding pocketing $13.2m at the end of June, not the behaviour you want to see from the CEO. The top four investors in the business have shaved more than 12.7m shares over the last eight months. The share price has largely shrugged off the position changes.
Minimal short interest to be concerned about, currently at 0.18%.
JLG’s investment case and underlying drivers are clear to understand, the need for its services is growing in tandem with extreme weather events but importantly, the business is able capture that demand. Its track record of growth and financial performance are comforting, the recent guidance upgrade adding to that comfort. JLG is hard to fault on a technical or fundamental examination and given opportunities via geographical expansion here and in the US, JLG offers a solid investment case. We would be comfortable adding JLG to a growth-oriented portfolio, with a small weighting.