The Australian dividend stock Johns Lyng Group Ltd (ASX: JLG) is down 40% from July 2024 and down even more since February 2024, as shown in the chart below.
It's been a rough time for the integrated building services group. This company specialises in providing restoration services across Australia and the United States after damage caused by insured events, including impact weather and fire events.
Johns Lyng's FY25 guidance appears to have contributed significantly to the company's valuation decline problem.
While it forecasts an increase in business as usual (BAU) revenue and operating profit (EBITDA) compared to FY24, the total revenue and EBITDA forecast for FY25 were below what market analysts were expecting.
For FY25, Johns Lyng has guided total revenue of $1.13 billion and total EBITDA of $138.1 million. The company said that it saw record catastrophe volumes through FY23 and FY24, but catastrophe volumes are reducing. FY25 catastrophe revenue is expected to reduce by approximately 75% year over year.
While there are issues to resolve, including matters in the strata industry raised recently in a Four Corners program, I do believe this is a turnaround opportunity for a few different reasons.
Turnaround potential
I had underestimated how significantly the company's catastrophe earnings could decline in the short term, and the market has now priced in the large profit reduction. But I think the Australian dividend stock's drop has gone too far.
Just like ASX mining shares, that cycle can turn again, in my view. It's normal for there to be shifts in weather patterns over the years. Thankfully, Australia has not seen as much damaging weather in the last 12 months compared to the past few years.
But as much as I'm hoping that there isn't, there could be another shift. If so, the company will be positioned to help. At this lower Johns Lyng share price, the market is not pricing in much of that possibility, in my opinion.
Regardless of what happens with catastrophes, Johns Lyng continues to expand its presence in Australia and the US through contract wins and acquisitions, which increases its potential future earnings. The Keystone Group acquisition further increases its position in Australia.
There is also potential for the company to expand to other countries in the future.
Earnings growth is a key driver of share prices, and Johns Lyng is still predicted to see profits rise. According to Commsec, the company is expected to generate earnings per share (EPS) of 19.3 cents in FY25 and 20.9 cents in FY26. That would put the current Johns Lyng share price at less than 18x FY26's estimated earnings.
Australian dividend stock credentials
The Australian dividend stock has grown its annual dividend per share each year since FY18, when it started paying a dividend, which I think is an impressive record.
More dividend growth is forecast in FY25 and FY26, according to the estimates on Commsec. It's projected to pay an annual dividend per share of 10.5 cents in FY26, which translates into forward grossed-up (with franking credits) dividend yield of 4%.
A rebound of the Johns Lyng share price, combined with a growing dividend, could be a winning combination.
