Johns Lyng Grows In Catastrophe And Strata

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Johns Lyng Group is consolidating its position in strata and building management while also embarking on a large catastrophe-related work contract

-Strong increase in earnings from Bushfire Recovery contract win
-Growth from several acquisitions and cross-selling opportunities
-Significant opportunity in strata management for Johns Lyng Group
 

By Eva Brocklehurst

Integrated building services company Johns Lyng Group ((JLG)) has provided a snapshot of its next growth phase, consolidating its position in strata and building management and obtaining a new contract with Bushfire Recovery Victoria.

There is an expected $55.5m in catastrophe-related work which has been funded by both the Commonwealth government and the Victorian government to clean up and ensure a safe environment on private properties after the recent storms.

Canaccord Genuity is conservative in its estimates and assumes a 12-month period for work to be completed. Additional work in public and common areas may also be forthcoming.

No material mobilisation costs are expected and operating earnings (EBITDA) margins are anticipated to be consistent with existing and similar work at around 11.5-12.0%. Canaccord Genuity increases its estimates for FY22 catastrophe revenues to $130.5m which results in EBITDA increasing to $15.2m from this segment.

FY23 estimates are also raised in line with what is expected to be the benefits from phase two of the related work from Bushfire Recovery Victoria. The broker increases its target to $5.05 from $4.50 yet, based purely on valuation, downgrades to Hold from Buy.

Bright & Duggan

Meanwhile, the company's Bright & Duggan business has expanded its management operations, acquiring three businesses one of which, Change Strata Management, manages a portfolio of around 3000 lots across 75 strata schemes and has a 2.4% market share.

The other two are Structure Building Management and Shift Facilities Management, taking the company's presence in the NSW strata market for management and servicing to 80,000 lots.

Change Strata will be a direct bolt-on while the latter two hold management contracts with 58 Sydney buildings encompassing more than 7250 lots and will form part of a new entity called Bright & Duggan Facilities Management. The vendor will have a 25% stake in the new entity. Consideration for the three is $8m, funded through cash, debt and equity.

Bell Potter upgrades FY22 forecasts for earnings per share by 13.9% following the catastrophe-related contract win and the anticipated contribution from the acquisitions, albeit the latter are not considered material to group earnings.

The broker remains positive on the outlook as Johns Lyng has large amounts of work in hand, but based on revised estimates considers the stock fully valued and retains a Hold rating with a $4.80 target.

Moelis considers the expansion of building management a significant positive step as the company will be able to consolidate both strata management and building management.

These will provide growth on a stand-alone basis as well as a large cross-selling opportunities including repairs and maintenance. Revenue is also annuity style and at a higher margin than the core business. Moelis upgrades estimates for FY21 and FY22 by 2.2% and 16.3%, respectively.

There are several more potential catalysts, the broker assesses, including combustible cladding work in both Victoria as well as other states along with further M&A across strata and building management. Moelis retains a Buy rating with a $5.67 target.

The opportunity in strata management is a critical component of Goldman Sachs' view on the stock, reflecting both an increase in market share and the ability to capture the cross-selling opportunities.

The broker suspects strata management could grow to be as large as the building services business, which generates more than $300m per annum in revenue. Facilities management can also capture more share of repairs and maintenance work. Goldman Sachs has a $5.00 target with a Buy rating.

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