Checking the pulse of Johns Lyng Group: the panel beater of the insurance world

Scott Didier is the CEO of Johns Lyng Group. It was floated just over a year ago in October 2017 at $1.00. It popped up to $1.40, in fact, from a lot of the first half of last year. But after the results, the stock fell like a stone from $1.20 down to 80 cents even though the results were very, very positive. Obviously, the key question for Scott is, what the hell happened then and what was going on? The shares have recovered a bit since December along with the rest of the market from 80 cents to $1.05, so it’s looking stronger now although it hasn't quite got back to obviously where it was but I think it's worth listening to Scott on the subject of what happened there. 

When I last interviewed Scott Didier about a year ago, I likened the company to a panel beater because what they do is they just work for insurance companies on what they call mediation work after catastrophes and disasters. And so that's really what Johns Lyng is about. They've just launched an operation in Florida in the US as they try and break into the US market, which obviously is huge and competitive. 

Here’s Scott Didier, the CEO of Johns Lyng Group.

Listen to the podcast or read the full transcript below:

Scott, can I just take you back to October when you released your results?  Looking at the announcement of the results, it was all good news.  Your profit was well ahead of prospectus forecast, the outlook was fine, everything was fantastic.  You said it in there that it was a strong performance, you were pleased having outperformed and all that stuff, yet the share price fell like a stone.  And over the next month or so it fell 30% and bottomed at 80 cents.  Can you explain to us what happened there?  What am I missing?

Well, to be honest, I don't really know myself, I think potentially people might've been a little bit confused.  When we listed, we listed really in the middle of Cyclone Debbie so I think there was some confusion around BAU against catastrophe work.  And I think that's sort of washed through and now people have got a clearer understanding of our business.  If you look at our business in our history of 14 years since I've had the business with Lindsay and the team, we’re a growing business, we've grown every year.  We've got a track record of growing 25% every single year because we're a sales-based organisation.  We just simply sell, it’s our DNA.

People look at that and look at business as usual, will they grow in business as usual circumstances and look at our history, we will grow.  Now add on to that as a bonus when there’s a catastrophe, when there's a big event, like happened in Sydney on the 23rd of December last year now, that is bonus, so I think once people actually understood that, then people started to come back in.

I'm not sure I fully understand Scott, are you saying that people were sort of talking or thinking about, or the market was thinking about an outperformance to business as usual because of Cyclone Debbie, they got carried away because of Cyclone Debbie? 

Yes, I think so.

I see.

I think so, I'm not really sure, but that's the only thing I can put it down to, that there was just some confusion only because that was right in the middle of Cyclone Debbie is when we listed, I think it caused some confusion, I think people expected more, but as I say to everyone, just look at our history, look at what we'll do on BAU and base that.  And then when a cat comes or a big event comes, it's a bonus and if you look at it like that it's very simplistic.

It's interesting because you floated at $1.00, the share price popped up to $1.20 day one and kept rising up to $1.40 and you stuck at around $1.30, $1.40 for just about your first 12 months and the PE at that price was around 25 and that seems to be justified by 25% annual growth over 14 years.

I think it's very justifiable, I think if people understand our business, you'll buy more stock.  We're a growing business, we’ll keep growing.  The beauty we've got now is we're actually going hard and very aggressive at acquisitions, which we've never done before.  Our growth on 25 percent year on year was all organic.  We didn't do any acquisitions but last year we got a lot of acquisitions in the pipeline that we're looking at hopefully we'll close out a few of those early this year which I'm quite confident we will do.  So, our growth, actually I hope it exceeds, and I'm confident will exceed 25%.  I think a lot of this is building credibility to our company and showing people that we do stand behind our words and we're strong and we're conservative and we're credible.

After the results last October, did you hit the road and talk to investors and talk to institutions?

We did.

Did you come to some knowledge about who was selling and what were the institutions saying to you?

We did do that, we went around and met with people and we didn't actually, I didn't say to the people, why did you sell?  But some people told us that they sold because they made good profits, they bought in at $1.00 and they sold at $1.30.  They were happy with that sort of lift and profit.  That's really all we gleaned from it, it was probably a bit of misperception and some people took the gain.

Tell us about the acquisitions.  What you told me a year ago when we last spoke was that you're the biggest in the game of insurance reinstatement builder, but there's quite a lot of other players. 

There is.

Is what you're doing rolling up smaller competitors?

We're trying to and we've spoken to a lot and we are looking at acquisitions with like-minded business, but it has to be a cultural fit and a fit where we also buy good management and that's been the challenge and that's probably why it's been a little slower than we would have liked.  These things take – the due diligence, obviously is going to take six, eight months on any business I would think.  But getting businesses that are culturally a good fit, where you’ve got management that have got a lot of runway left to want to work and drive their business.  It's a little challenging, but we're aggressively out there looking for them.

Are these private businesses generally?

Yes, they are all private.

And what are you paying for them?  What I mean by that is what sort of earnings multiple do you think you'll be paying?

I'd probably rather not say, Alan, to be honest because it all comes to just individual negotiation every time and it varies, it depends on how appealing the businesses are.  If they've got good management, and we can buy the management…

I suppose the benefit of this kind of strategy for a business like yours is that your stock is selling at a PE on the market of 19 to 20 times, but generally, when you buy a private company, it's like four or five times, so you get an instant benefit.

Instant lift, for sure, and obviously that's what we aim to do.

Tell us what's going on in what you might call the catastrophe business?  There was Cyclone Debbie, as you say, but it feels a bit like now there's pretty constant catastrophes going on, if not cyclones, certainly events taking place.  Is that the case?  Is that really what's going on?

Yeah, well it was pretty benign until December 23 when the big one hit in Sydney and that was declared a catastrophe by the Insurance Council of Australia.  Prior to that, it had been pretty benign, but generally during the winter, that's the benign period.  It's usually coming into October, November is when you start getting turbulent weather which is what we’ve seen.  And what we’re seeing now, we had December, New South Wales got hit pretty hard, right now Townsville's under flood.  There's some fires going on which, fires aren't great at all, in Tasmania, but there’s turbulent weather around North Queensland at the moment, we’ll see what happens there. 

There was a spike in Melbourne a couple of days ago and there were 400-odd SES callouts on that one.  It's probably the turbulent weather season right now and that will go right up until April.

And your relationships with the insurance companies, who are obviously your clients, are they all solid?  Any sign of losing any insurance company?

No.  They're all good.  They're all solid.  We resigned on some more pre-Christmas, which is great.  We’ve gained, if anything.  We've just signed a big contract with a strata business, which is great, and opened up a separate strata business for all multi-residential apartments and picked up a contract on the back of that.  It's very, very good at the moment.

Have you got the contract for the Opal Tower in Sydney, by the way?

[Laughs] No we don’t.

Is one of the reasons for making acquisitions to pick up new insurance companies?

Not really, just to get more market share.  New insurance companies, we can get those without acquisitions but some might have a couple of clients that we don't have.  It's more getting more market share.

Right.  You've recently opened in Tampa, Florida.  Tell us about the market in the US and what you're expecting there.

The market in the US is huge compared to Australia.  When we go to the US and I've done a lot of research now over there with everyone, we are really a pimple on a pumpkin in Australia compared to the US.  It's just huge over there.  The way we do things actually is quite proactive here to what they do over there.  They're probably doing things the way we did things 10 years ago over there, so there is real opportunity in the States and just the volumes and the size.  We talk thousands of claims, they talk millions of claims.

What do you mean by that they are doing things that we did 10 years ago?  Could you explain that in more detail?

Ten years ago, we worked for only loss adjusters in the Australian market, pretty much.  We didn't really work directly through insurance companies as such or insurance brokers as such.  We mainly worked for loss adjusters and third-party administrators.  In the States, they're pretty much most of the people in space are working for third party administrators, where we sort of disrupted that 10 years ago in Australia and started going direct to insurance companies and really offering a better solution for the customers.  By saying that, what I mean is we insisted we found out what the policies included so we could deliver what the insurance companies were promising to their clients.

This is obviously not an area I'm expert in, so I'm just trying to understand what the difference is.

What that means, yeah.

How that's different.

In simple terms, basically when I bought the company off Robert Lyng, we would get all our work off loss adjusters who would simply send you to an insurance job and a damaged property.  You wouldn't actually know who the insurance company was or what their policy or promises were to their clients.  You might go to a Chubb job, which is a high VIP policy or you might go to a lesser type policy, and what the promises are in the insurance policy, they’re vastly different.  When we were working for the loss adjuster...

In what way?  How did the insurance policy promises differ?

How they do?  Well if you've got a house policy and you're paying $10,000 a year for your house policy as opposed to $1,000 a year for your house policy, your inclusions in your $10,000 a year policy are going to be far greater than a $1,000 a year policy.  We insisted that we knew the difference so that we could put the right supervisors and the right staff on the right clients.  Does that sort make sense?

Well sort of, I guess I'm looking for the difference in those inclusions, the difference between a $1000 and a $10,000 policy.  What are we talking about?

Let's say if you’ve got a $10,000 insurance policy with Chubb and you get a little stain in your carpet, Chubb will most likely replace your whole house in carpet.  If you're paying $800 for a policy with someone else and you get a stain in your carpet, they’ll most likely just fix that one room up where the stain is.

Right.

If that makes sense.  It's really, you get what you pay for.

The relevance of this discussion now is in the difference with the US and Australia and what you're potentially bringing to the American market.  You’re in Florida now, are you talking directly to the insurance companies and are they finding that a new experience, are they?

We're not as yet.  We're still in the research phase, but that's what it's telling us and we will look to be a little bit disruptive over there and pretty much do what we did here because at the end of the day, it's a genuine better solution for the client.

Right, so you haven't done any jobs in the US, just yet?

We have, we do jobs every week over there and we've definitely done jobs but we're not big enough to be disruptive at this stage, but we will aim to get there.  On the back of that is a lot of opportunity.

Right.  I'm just trying to get a sense of how the investors should see your business.  Basically, you're saying that the core business in Australia growing 25% per annum and that's what you expect to be doing in the future and you're looking to supercharge the growth to some extent by disrupting the American market?

No that's probably too harsh, that's probably too big.  There's opportunity to do that in America.  Now to do that in America, you need to be sizeable.  We’re not sizeable in America, but the opportunity is there to grow into that, and the opportunity is there maybe to get some acquisitions over there to do that.  But the opportunity is definitely there but you need to be sizeable.  Right now, if we went in and did that, it wouldn't work because we were not recognised in America, we're too small but there is opportunity there.

One of the questions I asked you a year ago when we spoke was to what extent people should see you as a climate change play.  Are you seeing the consequence of climate change in the claims that you're getting?

Climate change is obviously very relevant because there's more and more activity around turbulent weather and cyclones and all sorts of things.  Climate change is really relevant and it's just more frequent all the time

And you're definitely seeing that increase in activity, are you?

Oh, absolutely.  Obviously, we monitor it and we do the stats on it, but if you look at the graphs over the last 10 to 12 years, you can just see every year there's more and more.  But there's also the claims, the cost increase because the value of property has increased.  For example, there was a property on Hamilton Island called the Round House that we looked at purchasing 10 years ago, it was worth $900,000.  We just rebuilt that because it got damaged in Cyclone Debbie at a cost of $3.6m, so the cost of building and the cost of homes is far greater than what it was 10 years ago.

Yes.  And what about your margins?

Our margins have stayed pretty similar.  Our margins are very competitive because insurance companies are pretty hard on us on margins, so really volume is what we try and seek.

Yes.  I suppose that's the difference between you and a normal builder, as you say, builders who deal directly with home owners, you're dealing with people who are going to crunch your margins.

Yeah, they do.  Look, insurance companies are hard, and they have to be hard on us.  They’re hard but they’re fair.

That was Scott Didier, the CEO of Johns Lyng.