Ord Minnett Research Recommendation: Johns Lyng Group (ASX: JLG)
Johns Lyng Group reported FY22 underlying operating earnings of $83.6m, up 58.9% year-on-year (YoY) and in line with guidance. Revenue was $895m, up 57.5% YoY, 3.2% ahead of guidance, and 3.5% ahead of Ord Minnett’s forecast and consensus. A fully franked final dividend of 3cps was declared, taking the full-year payout to 5.7cps versus our 7.4cps estimate.
FY22 gross margins remained consistent with historical levels at 22%, despite the broad-based inflationary pressures affecting the industry. This highlights Johns Lyng’s ability to pass on cost rises through its cost-plus pricing model. The company has also repositioned its commercial construction business to large-loss insurance work and scaled back the operations. Commercial construction accounts for more than 10% of group revenue.
The company provided FY23 earnings guidance slightly below current market expectations, although we see potential upside to this driven by catastrophe-related contract awards during the year, along with: 1) new business as usual client and/or contract wins; 2) the rollout of the Reconstruction Experts business in the US; 3) cross-selling activities in strata services business; and 4) potential for further acquisitions.
Johns Lyng did not provide a separate explicit disclosure of the contribution from the Reconstruction Experts business, which was acquired in January. However, management noted it had seen strong growth since the acquisition, with the backlog in the pipeline increasing from a current $168m, versus $115m in September 2021, which is expected to be delivered over the next 12–18 months.
In our view, Johns Lyng is well positioned to continue to generate strong revenue and earnings growth driven by industry tailwinds (due to more frequent catastrophe events) and bolt-on acquisitions, with low capital intensity and exposure to inflation. We have upgraded our recommendation to Buy from Accumulate, based on valuation, and increased our target price to $8.50 from $8.40.
Walter is the Editor of Ord Minnett's retail investor publications, such as the Opening Bell, Ords Weekly and the Ords Monthly, along with various investment guides and investor information published by Ord Minnett.
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