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Investors’ Chronicle: Craneware, Hochschild Mining, Johnson Service Group

BUY: Craneware (CRW)

The software group hopes normalisation of hospital operations will restore growth, writes Jennifer Johnson.

In May, the US declared an end to the Covid-19 public health emergency. For many members of the public, whose lives had more or less returned to normal, this would have seemed like a mere formality. But for businesses operating in the healthcare space, such as specialist software group Craneware, the official end of the pandemic was a positive sign for business.

“We have begun to see US hospitals return their attention to providing value-based care and investing in digitalisation,” said Craneware chief executive Keith Neilson. The company, which counts some 40 per cent of US hospitals as its customers, saw profits stagnate in recent years as cost pressures weighed on health systems. 

However, management reported “an increasing number of opportunities” entered its pipeline in the fourth quarter, with this momentum carrying over into the new financial year. These green shoots aren’t yet visible in Craneware’s accounts, although there were reasons for optimism. First, the group’s operating cash conversion reached 92 per cent of its adjusted Ebitda figure — up from 80 per cent in 2022.

It also finished moving its customers on to Trisus, its cloud-based data analytics platform. “We also see scope for a reacceleration of growth due to a renewed focus on new customer wins and upsells after the disruption caused by migrating customers to the cloud,” wrote Panmure Gordon analysts in a September 5 note.

FactSet broker consensus puts Craneware’s price/earnings multiple at just over 20 times for the current financial year. This isn’t cheap — but we think the group’s growth potential just about justifies it.

SELL: Hochschild Mining (HOC)

Full-year production and cost guidance has deteriorated at the precious metals miner, writes Mark Robinson.

The share price of Hochschild Mining came under pressure after it lowered its full-year production and cost guidance. The market had already been aware that first-half production would be constrained by the delay in securing approval for the Inmaculada mine’s Modified Environmental Impact Assessment (MEIA), a process that has also slowed development at the site, but Hochschild’s shares were marked down anyway.

Approval has been granted post-period-end, which will extend the project’s lifespan for an additional 20 years. Management is guiding for a revised production target of between 289,000 and 303,000 gold equivalent ounces, down from prior estimates, while all-in sustaining costs (AISC) are now pitched between $1,490 and $1,580 per gold equivalent ounce.

During the period under review, the AISC increased from $1,466 (£1,154) per gold equivalent ounce in the first half of 2022, to $1,572 at the 2023 half-year mark. The increase reflects the impact of the MEIA delay, falling production at the Pallancata mine and lower grades at San Jose. It effectively wiped out any potential gains through the 4 per cent rise in the average gold price received. Production also pulled back, coming in at 136,878 gold equivalent ounces compared with 157,380 ounces at the 2022 interim mark. Equivalent silver production contracted by 13 per cent to 11.4mn ounces.

The operational issues weighed on profitability and cash generation, with interim cash profits down by a quarter to $99.5mn, while cash and cash equivalents decreased from $144mn at the year-end to $93.6mn.

The discount to net asset value has narrowed since the year-end, and the miner’s short- and long-term moving averages are starting to coalesce, suggesting that the shares may be bottoming out. Yet the renewed advance in the US dollar could weigh on near-term valuations given the greenback’s inverse correlation to precious metals’ prices.

HOLD: Johnson Service Group (JSG)

“Stronger and more predictable” linen volumes are fuelling growth for the linen services group, writes Jemma Slingo.

Laundry is not glamorous, but it is necessary. As such, Johnson Service Group, which provides services for the hospitality sector and rents out work uniforms, should benefit from steady sales and predictable profits. Since the pandemic and the invasion of Ukraine, however, the Aim-traded group has faced fluctuations in demand and surging costs. 

The turbulence finally seems to be easing. In the first half of 2023, adjusted operating profits jumped by 48 per cent to £19mn as a result of “strong, more predictable” linen volumes and chunky price hikes, which offset “some volume attrition” in the workwear division. Organic revenue growth reached an impressive 20.6 per cent.

This figure is flattered by Covid-19, however, which still weighed on demand in the first half of 2022, and it is important to note that profitability is still a way off pre-pandemic levels. JSG’s adjusted operating profit margin was 7.5 per cent in the period, down from 13.5 in the first half of 2019, meaning profits remained £3.6mn lower than past highs.

The reasons for this are not surprising. Labour costs represent 45.1 per cent of revenue in the period, up from 43.2 per cent in the six months to 30 June 2019. This is down from 47.5 per cent last year, however, and management said it was “encouraged by the improving efficiency as volumes continue to return and, accordingly, expect labour, as a percentage of revenue, to reduce even further by the end of the year”.

The bigger problem lies elsewhere. Laundry is an energy intensive business and gas, electricity and diesel costs were “volatile” in the period. Although energy unit prices have gradually fallen, they are still high, representing 10.3 per cent of revenue, down from 6.5 per cent in 2019.

Management believes that JSG’s operating margin will return to historic levels in the “medium term”, but has not set an exact date. It is making obvious progress elsewhere, though, returning plenty of cash to shareholders and extending its reach with the acquisition of Celtic Linen — its first major move into healthcare. It has also increased its forecasts slightly for the full year. 

However, we remain nervous about JSG’s exposure to energy prices and the lack of volume growth in its workwear division.

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