Small Talk: Laundry group Johnson Service fails to clean up

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Another encouraging set of results last week from Davis Service Group highlights the potentially solid, if somewhat dull, returns available in the dry-cleaning and industrial laundry game. Which begs the question, why has rival Johnson Service Group been such a dud?

Newsflow at JSG has been woeful over the last two years – at least four profit warnings, board changes and a 47 per cent fall in the value of the company tells its own story – over a period in which the FTSE All Share has risen almost 17 per cent. Investors might have thought that it is hard to get cleaning services so badly wrong, but there is clearly more to this business than meets the eye.

The appointment of a new chief executive in April has, if anything, accelerated JSG's problems and share price decline. Charles Skinner, a former investment banker and chief executive of Brandon Hire, began his tenure at the helm by ditching a new IT system which cost the company a £15.9m write down. That, combined with tough trading conditions at Stalbridge, a supplier of linen to the hotel, catering and hospitality industry and delayed contracts mean that full-year profits are likely to come in lower than forecast.

Although the sale of JSG's dry-cleaning shops (Johnson's, Sketchley and Jeeves of Belgravia) fell through last year, it is surely only a matter of time before another bidder is sought. Given JSG's cashflow, it will almost certainly have to reconsider what it wants for the business – last year it turned down offers because it wanted more, but although trading looks to have improved the credit market has practically evaporated. Finding a buyer willing to pay more than was on the table last summer will be tough.

Any high-volume, low-margin business suffers when senior management takes its eye off the ball, and although JSG still has plenty to offer, in the short term it is hard to see newsflow getting much better. Mr Skinner is undertaking a management review but JSG's problems need more immediate attention.

With a market capitalisation of £145m, JSG is certainly cheap – but with good reason. For investors, there is a clear choice to be made here, and switching into Davis looks like a no-brainer.

Celtic Resources

A David and Goliath battle is taking place over the future of Aim-listed Celtic Resources, in the form of an increasingly bitter takeover dispute with Russian steel giant Severstal. Not unusually, the main point of contention is valuation – Celtic thinks the bid undervalues it, while Severstal believes its offer is fair. The truth probably lies somewhere in between.

Celtic's main complaint about the hostile 270p per share bid is that it "focuses on the past" and ignores Celtic's "strong financial position and asset base". True, Celtic has plenty of cash – well over £20m net of debt after asset sales earlier in the year, and it made an interim pre-tax profit of $17m (£8.3m).

For the full year it should report per-share earnings in excess of 30p, putting the stock on a sub-10 times multiple for the current year. Hardly expensive, particularly given the strong gold price.

That said, why shouldn't Severstal focus on the past when the Celtic share price has fallen more than 50 per cent since May 2005? Although the language it has used in attacking Celtic's rejection of its offer has been somewhat crude, to put it mildly, it may have a point. No one ever said that the Russian brand of capitalism is shy and retiring.

At this stage of proceedings, Severstal looks to have the cards stacked in its favour. Even if it is forced to push its price higher, it still only needs another 13.7 per cent of the stock in order to take the bid unconditional. Although Celtic has confirmed that another bidder could come into the fray, it is asking a lot for a white knight to take on Severstal.

Should the Russian bear win this round of baiting, as looks likely, the real losers are Celtic's retail investors. It is undoubtedly a decent long term play on gold – but one that now looks certain to end up in someone else's hands.

Oceanlinx eyes maiden voyage

Look out for Aussie wave power generator Oceanlinx when it makes its AIM debut. The company unveiled plans to list on London's junior market last week, and the stock is set to start trading next month.

The idea of harnessing the oceans' wave power and turning it into electricity has been around for long enough, but successful commercial applications have been hard to come by. The company believes its technology will allow it to produce electricity on a larger scale and with fewer technical issues than has previously been possible.

Without delving too deep into technicalities (which are well beyond your correspondent's understanding anyway), Oceanlinx's energy conversion unit compresses air into a turbine via pressure created by waves. It has developed a handful of operating wave farms in Australia, off the Cornish coast and Hawaii. Let's hope that they are all surfer-proof.

Broker Libertas Capital will bring the firm to the market, and word is it will seek to raise £20-£30m, valuing the company at £100m. With renewable energy a focus for new investment, expect a strong debut.

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