Cleaning Up in Northern Europe

09/08/2010 10:52 am EST

Focus: GLOBAL

John Snowden

Contributor, The IRS Report

UK cleaning and linens provider Davis Service Group is a strong defensive play with up side potential, writes John Snowden in The IRS Report.

The mix of textile maintenance and laundry services at Davis Service Group (London: DVSG) may not encourage the average investor to give the business more than a cursory glance. I feel there may be more value than this snap judgment would grant. Its almost-equal turnover split between the Nordic countries, central Europe, and the UK gives it a strong defensive position.

Davis’s Sunlight Textile Services subsidiary hires sheets to hotels, hospitals, and private businesses from a network of more than 60 sites. Sunlight Healthcare Solutions provides a range of services to UK’s National Health Service and private hospitals as well as to the wider health care community.

Sunlight is the UK’s leading provider of work wear rental and laundering services. Textiles and supply services are usually early-cycle recession businesses, and the group has had to work hard to protect profits from the ravages of recession.

Fortunately, Davis has strong businesses in the Nordic region, with operations covering Denmark, Sweden, Norway, Finland, Latvia, Lithuania, and Estonia with 42 plants and 3,200 staff. Last year, revenues in the Nordic region were up 1% to £330.8 million, with unchanged operating profits at £51.2 million. Constant currency operating profits were down 5%, but the cash generation was very strong, no doubt reflecting good management of working capital and lower capital expenditure.

The continental region includes operations in Germany, Austria, Holland, Poland, Czech Republic, and Slovakia, with 30 plants and almost 3,800 staff. The company improved its position in the German work wear market and continues to have leading market positions in several of these countries. Revenue in this region grew 8% last year to £245.2 million, with a 12% increase in operating profit to £32.7 million. The operating margin was up to 13.3%, thanks to the improvement in German health care and the progress in work wear and facilities businesses.

In the UK and Ireland, revenues dipped 2% to £394.9 million. The core textile maintenance business did well to suffer only a 3% decline. The group has 49 operating plants and 9,300 staff in the region.

[Companywide,] basic earnings per share rose 9% to 26.6 pence. Net debt was moderately higher due to acquisitions, such as the purchase of the Swedish and Norwegian mat businesses from ISS. The dividend for the full year was held at 20 pence, with the final 13.5 pence paid out on May 6th.

The company does not see any real market improvement in 2010, but with a strong free cash flow and robust balance sheet is well placed to wait for an eventual upturn. Financing needs to 2016 are well secured at interest rates below 5%. Five directors bought 116,713 shares in March, April, and May this year at prices ranging from 399 pence to nearly 429 pence. [Shares closed at 382.60 pence in London Wednesday—Editor.]

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