Small Caps | Mar 23 2022
This story features JOHNS LYNG GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: JLG
Increasing frequency and intensity of catastrophic events is good news for Johns Lyng Group’s growth, as the company delivered a record half in catastrophe works revenue.
-Necessary building works from east coast floods sustain sizeable near-term pipeline
-Climate change-driven weather events should drive a strong catastrophic works outlook
-Replicating proven strategy, Johns Lyng pursues further opportunity with US acquisition
By Danielle Austin
On the back of a first half catastrophe work revenue record, an ever-growing pipeline for Johns Lyng Group ((JLG)) has the market excited over the company’s outlook. The building services group specialises in insurance building and restoration services, working alongside insurance companies to rebuild and restore property after damage, weather and fire events. With experts predicting climate change will increase both the frequency and intensity of catastrophic weather events the market is anticipating a sizeable opportunity that Johns Lyng may be well-placed to take.
Near-term, recent flood events in both Queensland and New South Wales are supporting a pipeline of work for Johns Lyng. The floods have generated the highest number of building claims for a catastrophic event in around five years, with total claims currently at around 118,000, and by some estimations total claims value could exceed $2bn. Notably, flood claims relating to buildings are comparatively high to other catastrophe events, and the Intergovernmental Panel on Climate Change (IPCC) warns potential for the frequency of building-damaging events, and particularly events of coastal flooding and rising sea levels, will only increase in the future and are directly attributable to the impacts of climate change and global warming.
With an improving insurance works market share, Johns Lyng is positioned to benefit from the financial outlay these events will incur. Outside of contracts with traditional insurers, increasing catastrophic incidents could see state-funded repair programs increase, offering further opportunity for the sector in the repair works of public infrastructure and uninsured or under-insured households.
The company already secured a $50m contract win with Bushfire Recovery Australia, an organisation providing repair grants for the uninsured, but further opportunity exists in the $10bn annual reinsurance guarantee designated by the Queensland state and federal governments, while the Insurance Council of Australia has called for a further $2bn investment to improve the resilience to weather events of public infrastructure and private housing.
For broker Goldman Sachs, the current flooding events have supported a lift in Johns Lyng's catastrophe works revenue assumptions, lifting expectations to $150m per annum each in FY23 and FY24, up from $100m and $75m respectively, and justifying an increase to its long-term annual base catastrophe works revenue to $100m from $75m.
Reporting first half results last month, the company delivered an earnings increase for the half of 31.6% year-on-year to $36.5m, while revenue was up 27.1% year-on-year to $371.3m. Business-as-usual earnings were up 25.7% year-on-year to $28.9m, while record catastrophe work earnings were up 61.7% to contribute $7.6m. The company’s $50m Bushfire Recovery Australia contract supported catastrophe works revenue results, with $32m paid in the first half, a further $14m contribution expected in the second half and a balance of $9m expected in the next financial year.
Off the back of the strong first half, Johns Lyng issued an 11% upgrade to full year guidance and now anticipates revenue of $802.4m and earnings of $78.7m. However, with guidance not accounting for uncontracted catastrophe work, further upside is possible.
Business-as-usual works should also benefit from recent contract wins, which include national building and restoration panels with CHU Underwriting Agencies, Honey Insurance, Blue Zebra Insurance and Steadfast Claims Solutions, and extension of a domestic building contract with Suncorp ((SUN)) across six states and territories.
Replicating strategy in new geographies and services
Key to the company’s outlook is an intended expansion in the US, where Johns Lyng looks to replicate the strategy it has found success with domestically.
The company acquired US-based Reconstruction Holdings in December to expand operations internationally, and the addition is expected to contribute around $13m to second half earnings. Reconstruction Holdings is an insurance provider focused on property repairs, and the purchase offers a foothold for Johns Lyng to expand operations in the US, both through geographic expansion and through the exploration of adjacent services.
While Reconstruction Holdings has focused operations in four US states to date, the company holds authorisation to work in a further thirteen, offering a sizeable growth runway for Johns Lyng to pursue. The company has suggested it intends to leverage its Steamatic restoration business to expand operations into new geographies, while expansion into adjacent service offerings such as catastrophe works could offer provide further opportunity in the US.
The company has also suggested it will pursue opportunity in the consolidation of the currently fragmented local strata industry, and continues to roll out strata services.
The four brokers covering the stock and tracked by FNArena are all Buy rated with an average target price of $9.27. The stock is not covered by any of the seven major brokers in the FNArena database.
With a target price of $11.35, Goldman Sachs has the highest expectations on returns equating to a 29.3% upside to the current share price. The broker finds the company well-placed to meet increasing demand.
With a Buy rating and a target price of $8.70, Bell Potter finds value in Johns Lyng at current levels. It considers the business scalable, capital light and generating strong returns, with national reach across a number of services and well established relationships.
Finding the company’s upgraded full year guidance conservative, Moelis expects, based on historical evidence, unaccounted for uncontracted catastrophe work could contribute a further $4.7m to earnings guidance. The broker retains an earnings forecast 3% ahead of the company, and holds an $8.52 target price.
While it’s last update saw Canaccord Genuity downgrade its target price for Johns Lyng to $8.51 per share, the broker acknowledges the company’s strong earnings outlook. Canaccord analysts also anticipate a normalisation of industry operating conditions should support the company’s Commercial Building Services and Commercial Construction segments moving forward.
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