This article was published in The IRS Report in August 2010...

Defensive strength of cleaning group

The mix of textile maintenance and laundry services at Davis Service Group 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 judgement would grant. Its almost-equal turnover split between the Nordic countries, central Europe and the UK gives it a strong defensive position.

The origins of the company go back to 1920 when Godfrey Davis was formed to rent out automobiles. It was first listed on the London Stock Exchange in 1959 and in 1987 acquired Sunlight Services, a leading laundry business whose origins go back to 1900. In 1991 most of the car dealerships were sold - car rental had gone before that - and the name was changed to Davis Service Group.

1996 saw the acquisition of Spring Grove, bringing a second leading laundry business into the group. By 2001 the group had started to look outside the UK for expansion and in the following year bought Sophus Berendsen, a leading Danish laundry business, for £426m.

By this time the UK side consisted of three main operating companies each of which was a market leader in its own sector.

Sunlight Textile Services hires sheets to hotels, hospitals and private businesses from a network of more than 60 sites. Linen hire has several aspects, providing services to the hospitality industry to both hotels and restaurants. As a speciality, Sunlight has developed a whole range of services specifically designed for chefs, offering flexible non-fixed contracts with an immediate free exchange of sizes when required.

Sunlight Healthcare Solutions provides a range of services to the NHS and private hospitals as well as to the wider healthcare community. On NHS supplies, the company has a proven track record built up over many years.

Sunlight is the UK's leading provider of workwear rental and laundering services as well as supplying workwear and related accessories on a direct purchase basis for both and small organisations.

There is an automotive section which can supply a huge range of approved garments for motor dealerships and associated exhaust, tyre and repair service centres. It is possible to rent garments on a full rental service with all the correct badges and decorations as specified by the vehicle manufacturer.

Cleaning and replacing flooring costs time and money and the company has found that mats prolong the life of flooring and carpeting, delaying replacement costs. Research has shown that over 70% of dust and dirt in buildings has been walked in from outside, often amounting to several pounds' weight of dirt every day.The group's mat service reduces dust levels as well as preventing unsightly marks within entrances and improving safety.

Washroom services can also be provided to provide a clean and well-equipped washroom to make a good impression of both customers and staff.

Sunlight Clinical Solutions is a relatively new unit formed by the amalgamation of four existing leading names in healthcare - Rocialle, BDF, IHSS and Sunlight's ProteX. The division has been supplying hospitals for the last 25 years and supplies some 140 acute hospital trusts on a daily basis. In the UK, there are also facilities for e-beam and steam sterilisation drape and gown manufacturing as well as the processing of reusable drapes and gowns on a local basis.

As well as being the UK's leading provider of textile rental and laundering solutions, Sunlight has a direct sales division. This business operates under two separate companies, Sunlight Direct for work clothing and branded clothing and Mitre Hall & Letts for bed and table linen, towelling and related products.

Having built up a strong UK base, Davis Service Group joined many other companies on a rollercoaster ride for economic activity during the first decade of the 21st century.

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 the group 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 £330.8m with unchanged operating profits at £51.2m. At 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 workwear market and continues to have leading market positions in several of these countries.

Revenue in this region grew 8% last year to £245.2m (£226.2m) with a 12% increase in operating profit to £32.7m (£29.2m). At constant currency revenue was 2% down but adjusted operating profit improved by 2%. The operating margin was up to 13.3% (12.9%) thanks to the improvement in German healthcare and the progress in workwear and facilities businesses.

In the UK and Ireland, revenues dipped 2% to £394.9m from £401.2m including an improved contribution of £60.2m (£55.4m) from Clinical Solutions and Decontamination services which the company reports on as a separate segment. The core textile maintenance business did well only to suffer a 3% decline to £334.7m from £345.8m, with profits down 3% to £35.4m. The group has 49 operating plants and 9,300 staff in the region.

Group turnover for the year to December 31st 2009 was £953.9m against £970.9m for the previous year but pre-tax profits were little changed at £60.4m against £61.7m. Basic earnings per share rose 9% to 26.6p. 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 20p with the final 13.5p paid out on 6thMay this year.

The group is due to report interim figures on 27th August which may reflect the benefit of further cost cutting with a maintained dividend.

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 399p to nearly 429p.

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John Snowden is a regular contributor to The IRS Report.

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