Derek Pain: Johnson is on the mend, and its shares could outperform

No Pain, No Gain
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The Independent Online

Johnson Service Group is one of those companies that appears to have resided on the stock market for more years than most of us can remember. A collection of family-run dry-cleaning chains put together in the early 1920s, it enjoyed decades of relatively profitable trading and a series of takeover propositions.

But a few years ago, the group's whiter-than-white profits record was almost irreparably damaged. In two years, it suffered losses of more than £50m. Remedial action was essential – and urgent. New management was drafted in, a restructuring (including an £82.5m disposal) undertaken, and funds raised from shareholders. In addition, as a cash-saving manoeuvre, the shares were downgraded to the junior AIM market from the full listing status they first enjoyed in 1958.

Now it appears Johnson is comfortably on the mend. Last year, pre-tax profits emerged at £20.6m, although the adjusted figure was £12.2m. Even so, the group returned to the dividend list, an important consideration in these low interest rate days. And this month's interim figures underline the strength of the recovery. There is a pre-tax loss of £2.2m, but the adjusted figure, just to confuse matters, comes out at a £6.2m profit, a 17 per cent advance. The main difference between the two results is that £6.2m does not include a range of special charges, such as amortisation and impairment. The interim dividend is increased by 8 per cent.

Chairman John Talbot, a turnaround specialist who arrived when profits turned into losses, is satisfied with the first six months' progress, and believes the group is "well placed for a successful second half".

The shares illustrate Johnson's fall from grace. Before it hit trouble, they were changing hands at above 400p. They are now around 21p, having advanced from 16p on the back of the interim figures.

The group, which can trace its lineage back to 1780, still embraces more than 500 dry-cleaning outlets. Most are now under the Johnson banner, although there is an upmarket London-based business, Jeeves of Belgravia. Snowbound Britain and tough trading conditions cut the dry cleaning interim profit from £1.3m to £500,000.

Two other divisions, adopted in more recent years, outscore dry cleaning. Facilities management, providing services to many public and commercial organisations (including high-street chains), produced roughly unchanged profits. The star performer, however, was the textile rental business which increased returns by 13.4 per cent.

The interim display prompted analyst Robert Morton at stockbroker Investec to lift his year's forecast from £13.3 to £14.1m. Lower interest charges is one factor behind his revision. And he sees steady, if unspectacular, progress over the next few years, with profits hitting £16.3m in 2012.

Over-expansion at Stalbridge Linen, which supplies catering and leisure markets, caused many of the problems that beset the group and created the losses. But Stalbridge and its sister company, Apparelmaster, providing rented work wear, are now the backbone, and the biggest section, of the group.

It is, perhaps, surprising that a business such as Johnson did not attract predatory attention during its hardship days. After all, over the years it experienced quite a few takeover flirtations. Oliver Jessel, one of the financiers who dominated the stock market in the 1960s, was one thwarted bidder. Mr Jessel was a stock market operator at the same time as the legendary Jim Slater who was then probably the most powerful man in the City. But the Slater empire became too big. Eventually it was consigned to the history books. Mr Slater, once an Independent share-tipping columnist, is still around the City as an investor as well as offering his insights into financial affairs.

I am not aware he has any connection with Johnson. And I suspect it is not the sort of company that would appeal to him. But there is no doubt the cleaner's shares are very cheap, although the dividend yield is modest.

Mr Morton has a conservative target price of 25p. With its cleaning shops being revamped to embrace a new green cleaning technology, and Apparelmaster and Stalbridge looking strong, the shares could outperform.

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