A profit warning at industrial linen processor Berendsen (BRSN) which sent shares plunging 20% today could spell trouble for UK rival Johnson Service (JSG:AIM).
Berendsen said cost over-runs in its UK flat linen business, which rents and cleans bedsheets, tablecloths and other textile products to the healthcare and hospitality sectors, would deliver a hit to profit expectations this year.
It is now expects an operating profit of £160m, down from earlier, consensus forecasts of £167m.
EARLY WARNING
Soft revenue performance and weak margins at Berendsen’s flat linen unit were reported in its half-year results back in July and today’s update indicates the division continues to struggle. Shares quizzed Johnson Service chief executive Chris Sander about the state of the industry back in September in a half-year results call.
‘Flat linen always has been a challenging market but our strategy is to develop our markets with well established and well invested businesses,’ said Sander.
‘It’s about volume and so far it’s fine but it is a challenging market.’
JOHNSON SERVICE READ-ACROSS?
Johnson earns around one third of its sales from its industrial workwear businesses, which includes its Apparelmaster brand. The remaining two-thirds are split roughly equally between hotels and a mixture of other businesses, mostly restaurants.
Organic growth at Johnson in the six months to 30 June, which excludes contributions from newly acquired units, was 5% according to chief financial officer Yvonne Monaghan. Overall revenue gained 26% to £137.6m and operating profit advanced 43% to £16.1m.
‘Second half performance is always stronger than the first - the business is slightly seasonal - and generally hotel occupancy is holding up,’ added Sander in the September interview.
COMPANY-SPECIFIC ISSUES
Disappointing trading at Berendsen may not be a result of general weakness in the industry, according to analysts at HSBC.
‘The core of the issue rests in the Hospitality and Healthcare business lines, where machine failure exacerbated issues and drove up costs to maintain service levels to clients,’ says a commentary published today.
‘The company has previously discussed the need to invest in the UK business and is progressing with the implementation of this plan. We do not believe the issue is particularly external, there is no mention of Brexit or Living Wage from the company in the release. Clearly the planned investments in equipment and operational capacity are needed, but they are at least already in progress.
Shares in Johnson trade 0.7% lower today at 105p, though they are up 14% year-to-date. Berendsen trades 17% lower at £10.22.
