Shares in textile services and workwear rental firm Johnson Service Group (JSG:AIM) dropped 10% to 128p after it announced plans to raise £85m in new financing through a non-pre-emptive share issue, in order to give it enough liquidity to see out a ‘prolonged lockdown period’ and give it options to grow once the pandemic eases.
The placing of 73.9m new shares, which represents almost 20% of the company’s existing share capital, is priced at 115p against an average price of 123.6p over the last 10 days.
The workwear rental business has traded in line with management expectations, with like for like revenues ‘slightly negative’ in the first quarter and down 12% in April as most of its key customers remained open along with its processing sites.
However, laundry services for the hotel, restaurant and catering (HORECA) industry have seen a dramatic downturn as the hospitality industry was forced into lockdown by government measures.
Like-for-like revenue growth was a healthy 9% in the first quarter, but with the closure of the majority of its customer base revenues dropped 27% in March and a staggering 97% in April, forcing the firm to close most of its processing sites.
In its scenario planning, management has conservatively assumed that the market begins to recover slowly from July, with workwear revenues not returning to 2019 levels until the first half of 2022.
In HORECA it assumes that ‘revenue at the start of the recovery is at 25% of typical activity levels, gradually improving each month to reach 75% of typical activity by the end of FY20 with sites reopening on a phased basis as volumes increase.’
As with workwear, the firm doesn’t see HORECA revenues normalising until the first half of 2022 at the earliest.
The purpose of the placing is not only to improve the firm’s financial position in case of a prolonged lockdown period, with revenues slow to recover as per its base-case scenario, but to allow it to continue investing in the business to drive efficiency gains as well as giving it the option of responding to growth opportunities.
So far the firm has deferred £8.2m of capital spending commitments at its Leeds and Clacton facilities. These will now be paid in three equal instalments between July this year and January next year.
It has also reduced all non-essential spending, withdrawn the 2019 dividend, taken most of its delivery vehicles off the road and renegotiated maintenance contracts, and management have taken a salary cut in order to conserve cash.
As one of the biggest and best capitalised firms in its sector, Johnson Service is likely to emerge from lockdown in better shape than many of its rivals. Having more cash in reserve will allow it to increase its market share further still by picking off weaker competitors post-crisis.