Johns Lyng Group (ASX:JLG): One of a few ways to profit from climate change

Johns Lyng Group (ASX:JLG) is a restoration services company, repairing properties after damage by insured events, including weather and other impact incidents. This could be one of the few companies that may be a beneficiary of climate change.

Johns Lyng Group has bee around for a long time

Johns Lyng Group was established in 1953 and for its first five decades was in the hands of the founding Lyng Family and was mostly a Victorian business. In 2003, current CEO Scott Didier bought it outright and has taken it to the next level. He has made it a national business and a public one, overhauled the culture and increased the business’ turnover from $12m to more than $400m today.

It has 17 companies across three operating divisions: Insurance Building & Restoration Services, Commercial Building Services and Commercial Construction. Beyond repair and restoration works, it provides hazardous waste removal, strata services, residential and commercial flooring, shop-fitting and emergency household repairs. In some instances, it wins government contracts to assess properties damaged by floods. The company has also made forays into the US, playing a part in the recovery from Hurricane Ian which hit Florida.

Johns Lyng has a long term track record of earnings growth, both as a private and public company. It has achieved a 25% revenue CAGR since 2004 and a 35% CAGR growth in the past 5 years since its IPO.

Short-term weakness in the share price

The past couple of years have not been easy, however. Its shares are down 30% from all time highs reached in early 2022, following a rough summer of floods. It is easy to blame the market conditions at the time, in the immediate aftermath of Russia’s invasion of Ukraine, but a lot harder to pinpoint to specific company factors. It is not as though the company was seeing revenues decline, nor seeing substantial cost inflation that was eating into its margins. Granted many of its sector peers were, including some companies that were listed.

Nonetheless, it isn’t unreasonable to assume investors became concerned about its big valuation (55x P/E at that time). The sale of 1m shares in the company by Scott Didier and Lindsay Barber (Executive Director and Chief Operating Officer) did not help. Even though the pair remained a stake of just over 25%, investors loathe it when directors sell shares.

It is important to note that JLG is a contractor and has freedom to pass costs to insurers. It achieved a record $895m in revenue and a $38.5m profit (up 58% and 40%). It followed this up with $1.28bn in revenue and a $63m profit (up 43% and 64%).

Johns Lyng Group (ASX:JLG) share price chart, log scale (Source: TradingView)

A retreat in FY24, but a return to growth thereafter

Consensus estimates for FY24, drawn from 12 analysts, do suggest a retreat in revenue to $1.24bn and $52.8m (down 3% and 17%). Nonetheless, a return to growth is expected in FY25 with $1.29bn in revenue and a $63.9m profit (up 4% and 21%), followed up with $1.39bn in revenue and a $69.5m profit (up 7% and 9%).

This puts the company at an EV/EBITDA of 11x and a P/E of 26x. Not cheap, but perhaps you get what you pay for. The consensus share price for the next 12 months is $7.03, a 25% premium to the current price.

A balanced risk-reward play

The risks with this company include persistent cost inflation, the potential for the world to bring climate change under control and reduce extreme weather events as well as the possibility of key personnel departure.

But all things considered, we think this stock is one of the best opportunities on the ASX right now.  It is one of the few companies that could benefit from climate change and has suffered only modest impacts from cost inflation in the past couple of years.

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