Small Caps | Jun 11 2020
Demand for the building & restoration services of Johns Lyng has skyrocketed after a series of catastrophic events, suggesting the company will withstand any pandemic-related setbacks.
-Record number of job registrations to May 2020 related to catastrophes
-Commercial building services work likely to decline in FY20
-Potential benefits from Victorian government programs
By Eva Brocklehurst
There are jobs aplenty for Johns Lyng Group ((JLG)), which operates insurance building & restoration services. Year-to-date registrations include work that has emanated from six catastrophic events across Australia's eastern seaboard between September 2019 and February 2020.
Demand for the company's services has skyrocketed, with a record number of job registrations, at 55,000 for the year to May compared with 61,000 over 2019. In May alone the company has booked 8400 new jobs, up 78.7% of the previous May. This is provided a solid foundation for growth in this division.
FY20 guidance has been upgraded by 10-12% with revenue forecast at $470m and operating earnings (EBITDA) at $39m. The total amount of catastrophe-related work is yet to be fully determined. Nonetheless, it is expected to contribute operating earnings of $7.5m in FY20 on $72m in revenue, which Canaccord Genuity suggests implies a margin for this division of 10.4%.
Moelis, which does not rate the stock, also expects further margin expansion given the operating leverage derived from catastrophe work later in the event cycle, as well as increased contributions from higher margin segments such as strata management.
Management has indicated its acquisitions such as Bright & Duggan, Capitol Strata and Air Control Australia are all performing well and will help with full year contributions in FY21 along with the completed integration into the Johns Lyng systems.
Meanwhile, commercial building services work is likely to decline in FY20 because of the standstill in property staging and retail shopfitting amid pandemic-related restrictions.
Bell Potter calculates the upgrade to earnings from the insurance building work should still more than offset the forecast decline in commercial building services and remains confident the company is on a strong footing, retaining a Buy rating with a $2.90 target.
Moreover, Canaccord Genuity suspects there may be a benefit from the building works package, worth $2.7bn, announced by Victoria's state government, as well as the establishing of Cladding Safety Victoria and a $550m program to reduce risk associated with combustible cladding on residential apartments.
As work in hand is currently locked in until at least Christmas, and volumes in insurance restoration work continue to grow, the broker assesses the business could have FY21 earnings underwritten by the time it reports in August 2020. Canaccord has a Buy rating and $2.83 target.
Johns Lyng is an integrated building services company which provides insurance restoration work as well as commercial services throughout Australia. There are three divisions, including insurance building & restoration that restores property and contents after damage from weather and fire events.
Within this division there are five units and the company also operates a US-based fire, water and flow restoration business called Steamatic. Commercial building services has four units incorporating such areas as shopfitting and floor coverings.
The third, commercial construction, specialises in building and construction projects in Victoria in aged care, hospitality, retail, education and industrial segments.
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