QVG Capital: Johns Lyng Group
Ticker ASX: JLG
Sector Industrial Services
What the company does:
Johns Lyng is a building services company with particular focus on repair and restoration of residential and commercial properties for insurance clients. Johns Lyng also has a small but growing strata management business.
Why we chose this stock:
Johns Lyng is our largest holding and a company whose defensive growth and unique culture is under-appreciated by the market. At QVG we look for Quality, Value and Growth characteristics in stocks. Johns Lyng is high quality meaning that it generates strong cash flow and high returns on capital with low gearing. It grows revenue and earnings in the mid-teens organically and tops this up with bolt-on acquisitions. The valuation is fair for a company with such strong organic growth and quality characteristics and see potential for further valuation upside should the company make acquisitions in its strata division.
Our take on the stock:
Johns Lyng operates in an unglamourous industry with seemingly low barriers to entry. We think their strong history of organic growth is driven by a unique culture which is hard to replicate. A third of the company is owned by the board and management and divisional managers get paid a 10% profit share on the profit of their businesses. Johns Lyng has a culture that identifies, nurtures and rewards talent. The company also benefits from a fragmented competitor set and customers – mostly insurance companies – who like to deal with a national player with a track record of excellent service and ability to respond to catastrophic events quickly wherever they occur. We expect the company to continue to grow in the mid-teens organically. This growth will come from replicating their market share in Victoria in their core business across NSW and QLD and by offering building services to their strata customers.
Potential risks:
While a season of no fires, floods or storms would be good for the country, some of Johns Lyng’s revenue comes from responding to such events.
This information has been prepared and provided by QVG Capital. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 15 October 2020 and is subject to change.
