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Why the Spotless Group share price has raced 60% higher since August

Australia and New Zealand’s leading integrated facility services provider has given shareholders an early Christmas present this year, with the Spotless Group Holdings Ltd  (ASX: SPO) share price rising more than 60% since the start of August.

Lets take a look at why….

FY18 financial results

Spotless Group started surging higher immediately following the release of its FY18 financial statements in August, with investors clearly responding well to the turnaround in its performance.

The key highlights include:

  • Revenue from ordinary activities of $3,045 million, up 1.3% on FY17
  • EBITDA (Earnings before interest, debt, amortisation and appreciation) of $131.5 million, up by more than $330 million from the loss before interest, debt, amortisation and appreciation of $199.2 in FY17
  • EBITDA margin of 4.3%, up from negative (6.6%) in FY17
  • Net loss after tax of $2.3 million, reflecting a 99.3% improvement on the $347.4 net loss incurred in FY17
  • Net debt of $735.4 million, down 6% from FY17
  • Leverage ratio (Net debt / EBITDA) of 2.8x, down slightly from the ratio of 2.9x achieved in FY17

The company’s FY18 results were impacted significantly by a number of one-off items resulting from the takeover of Spotless Group by Downer EDI Limited (ASX: DOW) in 2017.

The significant items related to the takeover totalled $120 million in FY18, including contract rationalisation and restructuring costs of $9.5 million, laundries goodwill impairments of $40 million, management redundancies and integration costs of $9.5 million and other balance sheet items of $61 million.

I expect further improvement in Spotless Group’s EBITDA margins in FY19, with the company likely to incur less one-off costs associated with the Downer takeover.

Leadership changes

In October Spotless Group also announced that Dana Nelson, Chief Executive Officer and Managing Director of the company, would step down effective from October 16, while still working with Spotless Group on its integration with Downer until early 2019.

Peter Tompkins was appointed as the new Chief Executive Officer and Managing Director of Spotless Group. Mr Tompkins has been a member of the Downer Executive Committee since 2011 and played a key role in addressing a range of operational and commercial issues at the Royal Adelaide Hospital for Spotless Group.

The company highlighted the operational experience of Mr Tompkins that will reportedly help drive high levels of performance for Spotless Group. I believe new leadership could be just what Spotless Group needed to revitalise the business following its recent operational and ownership changes.

Foolish takeaway

In its annual report, Spotless Group highlighted that Downer’s 87.8% ownership stake strengthens the company’s outlook, benefiting its balance sheet and cash flow performance, while also creating operational synergies.

I believe that Spotless Group has indeed turned around its financial performance significantly and will report even stronger earnings in FY19 – bolstered by the resources and personnel of Downer.

However, following its recent share price growth and considering the company is trading at an elevated price-to-earnings multiple of 22.5x, I will happily to sit on the sidelines for now; instead favouring ASX200 industrials companies like Transurban Group (ASX: TCL) and Brambles Limited (ASX: BXB).

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Motley Fool contributor Gregory Burke has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Transurban Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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