Johns Lyng Group (ASX:JLG): Is it a ‘buy the dip’ opportunity? And should you invest in it?

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.

It was a difficult second half to 2024, but we think this could represent a buying opportunity for investors. OK well…some of them. Some investors, particularly ESG-focused investors may not be comfortable with this company.

Johns Lyng Group has been 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 few years have not been easy, however, particularly the last 6 months. Its shares are down over 50% from all time highs reached in early 2022, following a rough summer of floods in 2021-22. 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) back then 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 $1.2bn in revenue, $130m EBITDA and a $63.3m profit. The company told investors FY24 was an inflection point for growth in the USA and in Australia. It grew its American business partners to 25 and was appointed to AllState’s Emergency Response and Mitigation Panel, potentially giving it access to 16m people across America. In Australia and New Zealand, it extended several contracts including QBE, Suncorp and Tower.

For FY25, Investors have been told to expect $1.22bn in revenue and $147m in EBITDA, which would be up 26% and 16%. In September 2024, it bought insurance building and restoration services provider Keystone. Keystone is expected to contribute $100m in revenue and $9m in EBITDA.

A reputation hit

The company’s reputation took a hit in September when it was named in an ABC investigation into the strata industry. The ABC’s work started early in the year with the allegation that one strata companies was ripping off its customers through taking commissions from insurers and repair contractors, as well as charging high fees.

After this, the ABC invited its audience to submit complaints and published follow-up coverage. What would have ticked off strata-levy payers was the president of the industry’s peak body being caught on a webinar joking about kickbacks – particularly the NSW Government’s strata hub which requires all unit-holders to pay a $3 fee to fund a digital platform on strata schemes, and the strata industry was charging fees to administer the scheme. ‘That bought me a brand new ute…And will continue to buy, well, buy someone else a new ute,’ he said.

Sorry, what has all this got to do with JLG? Let’s get back on track. The article talked about one incident where JLG was hired to replace a set of stairs, ruined after a car ran off the road. It quotes $95,000, but the strata manager found a solution at one-third the cost, leaving JLG to slash its price by 20%. The Chairman of the owners corporation found a link between JLG, the strata manager and insurance brokers and also uncovered that a proportion of earnings were given to JLG (indirectly through Bright & Duggan which is majority owned by JLG).

JLG responded to investors telling them it got no commissions or rebates from the insurance and while Bright & Duggan did, these were not a significant revenue stream. It did not shy away from the quote saying it reviewed the process and was ‘satisfied our processes are robust and transparent’.

A balanced risk-reward play

Analysts have a mean target price of $4.91 which is a 30% premium to the current price. It is trading at 19.7x P/E and 8x EV/EBITDA for FY25. These multiples drop to 17x P/E and 7.3x EV/EBITDA for FY26. Consensus for FY26 suggests $1.34bn revenue and $147.2m EBITDA which represent 9% and 11% growth.

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.

We like this company, but some investors may want to avoid companies ‘profiting’ from climate change as well as from what is going on in the strata industry. Others may just think the system is the system and if you can’t beat it, work with it by profiting from it.

Conclusion

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.

Even though it took a reputational hit, we don’t think the specific incident is a case of ‘ripping off’ customers. And more importantly, there’s no evidence JLG will lose business as a result. Companies (such as Medibank) have recovered from crashes caused by far more adverse reasons than JLG.

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