FDM Group (Holdings) PLC

FDM Group (Holdings) PLC (FDM) is a London-headquartered international professional services company which recruits, trains and deploys its own permanent IT and business consultants at client sites across several sectors, with operations in Europe, North America and APAC. The group hires those looking to return to work after a career break, ex-forces personnel and graduates to equip them with relevant technical skills to work with clients on operational and business transformation programmes. The company specialises in a range of technical and business disciplines and can provide scalable resources at short notice and across multiple client sites with flexible contract terms. The operations of the group are differentiated in four geographical segments, namely UK and Ireland, North America, Asia Pacific, and Rest of Europe, Middle East and Africa, excluding UK and Ireland.

Financial Highlights (H1 FY 2019, in £m)
 
(Source: Company Filings)

As Mounties - freelance IT contractors and its own employees - assigned to client sites at H1 2019 totalled 3,846, an increase of 13% from 3,416 at H1 2018, Mountie revenue increased by 16% to £132.6 million (H1 2018: £114.6 million), while total revenue increased by 14% to £134.4 million, reflecting a 44% decline in contractor revenue. Adjusted operating profit rose by 7% to £27 million while reported operating profit rose to £25.23 million from £23.2 million in H1 2018. Reflecting the rise in overheads in the period to £39.8 million, adjusted group’s operating margin decreased to 20.1% (restated H1 2018: 21.4%). Adjusted profit before tax was up by 7% to £26.6 million from £24.9 million reported last year, while reported profit before tax rose by 9% to £24.9 million against £22.9 million in H1 2018. Adjusted basic earnings per share were reported at 18.9 pence (restated H1 2018: 17.8 pence), while basic earnings per share rose in the period to 17.6 pence (restated H1 2018: 16.3 pence). The company rose the interim dividend by 10% to 16.0 pence. The net cash balance declined to £28.7 million as at 30 June 2019 (H1 2018: £29.8 million) and net cash flow from operating activities increased to £17.1 million in the first six months to 30 June 2019 from £14.1 million (restated) in H1 2018.

Valuation Methodology
Method:  Price/Earnings Approach (NTM)


Share Price Commentary
 
Daily Chart as at 03-September-19, before the market closed (Source: Thomson Reuters)
 
On 03 September 2019, at the time of writing the report (at 8:50 am GMT, before the market closed), FDM stock was trading at GBX 791, down by 0.38 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 1,014.00/GBX 721.00. The company’s stock beta was 0.83, reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £872.96 million, with a dividend yield of 3.97 per cent.

Conclusion
While the model of the company is resilient against any direct impact from threats and uncertainties which are expected to arise from Brexit, spending decisions of some clients in the UK and EU could be adversely impacted by the effects of Brexit. However, in an event of downturn, the company can see increased demand for its services as Mounties can be attractive to clients during times of economic or political uncertainty, as companies would be reluctant to hire permanent employees, making contractual labour more attractive. Moreover, the group has a diversified global geographical footprint, which ensures a sustained flow of cash in case of turbulence in one region.
 
Based on healthy prospects and supported by valuation done using the above method, we have given a "SPECULATIVE BUY" recommendation at the closing price of GBX 794 (as on 02 September 2019) based on 22.59x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.).

*Peers of the company are SDL PLC, NCC Group PLC, Kainos Group PLC, Softcat PLC and Sophos Group PLC
*The Speculative Buy recommendation is also valid at the current price as on 03-September-19.
 

Johnson Service Group PLC

Johnson Service Group PLC (JSG) is a Cheshire, United Kingdom-headquartered provider of high-quality textile rental and related services across a range of sectors throughout the country, including hotel, restaurant, catering and hospitality markets. Through the Apparelmaster brand, the group is the leading supplier of workwear and protective wear in the UK and owns and operates other brands like South West Laundry, PLS, Afonwen, Bourne, London Linen and Stalbridge, which provide high volume hotel linen services and premium linen services. The operations of the group are differentiated in two core operating segments, namely Hotel, Restaurants and Catering, and Workwear.

Financial Highlights (H1 FY 2019, in £m)
 
(Source: Company Filings)

The revenue of the group increased by 9.8% to £167.1 million (H1 2018: £152.2 million) due to the benefit of acquiring a number of contracts in January 2019 and a full six months trading from the South West Laundry acquisition, while organic revenue grew by 7.5% in H1 2019, reflecting continued high levels of customer retention across all markets and strong sales growth. Due to ongoing efficiency improvements and strong growth in revenue, adjusted operating profit during the period rose by 13.6% to £22.6 million (H1 2018: £19.9 million), while statutory operating profit rose by 12.7% to £17.7 million. The statutory profit before taxation increased by 8.6% to £15.2 million (H1 2018: £14.0 million), while adjusted profit before taxation increased by 10.4% to £20.1 million (H1 2018: £18.2 million). Statutory diluted earnings per share rose by 6.5% to 3.3 pence and adjusted diluted earnings per share was up by 10.0% to 4.4 pence (H1 2018: 4.0 pence). Strong results reflected in a 15% increase in interim dividend to 1.15 pence (H1 2018: 1.00 pence). After including the impact of IFRS 16, net debt at the end of June 2019 was £130.5 million, while net debt (pre-IFRS 16) at 30 June 2019 was £92.6 million.

Valuation Methodology
Method:  Price/Earnings Approach (NTM)


Share Price Commentary

Daily Chart as at 03-September-19, before the market closed (Source: Thomson Reuters)
 
On 03 September 2019, at the time of writing the report (at 11:15 am GMT, before the market closed), JSG stock was trading at GBX 165, up by 0.97 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 177.00/GBX 112.00. The company’s stock beta was 0.53, reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £608.70 million, with a dividend yield of 1.90 per cent.

Conclusion
In the latest period, helped by high levels of customer retention and excellent sales growth, the company reported strong performance and reported that the management increased its expectations of the results for the year. However, the company might face reluctance to invest from within its customer base, reduction in levels of employment, or change in consumer confidence in case of Brexit, which can impact the financials of the group. An increase in the cost of labour – especially if low-cost labour from continental Europe is stopped - or inflation could constitute a risk to its ability to maintain margin, considering the recent depreciation of Sterling, which can increase price levels. Revenues and margins can also be impacted by aggressive pricing strategy by competitors, as the group operates in a highly competitive marketplace.

Based on the headwinds faced by the group, we have given a "WATCH" recommendation at the current price of GBX 165 (as on 3 September 2019), while we look for any upcoming catalysts in the near term.
 
*Peers of the company are PayPoint plc, Fiera Milano SpA, Restore PLC and Sanne Group PLC
*All peers and forecasted figures have been taken from Thomson Reuters.

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