Is Johns Lyng Group (ASX:JLG) a Contrarian Opportunity Despite Its Stock Decline?

Market sentiment has pushed JLG’s shares down over 60% in 12 months—but is the sell-off overdone?

Johns Lyng Group (ASX:JLG), a leading provider of construction and building services in Australia and the U.S., has seen its stock price plummet -62.68% over the past year, hitting a 52-week low of $1.96 in April 2025. Yet beneath this volatility lies a company with consistent ROE, resilient earnings, and an undervalued balance sheet—signs that the market may have overreacted. For contrarian investors, this could be a rare chance to buy a cash-generative business at a deep discount.

The Stock’s Decline: A Mismatch with Fundamentals

The sell-off appears disconnected from JLG’s operational performance. Let’s break down the key metrics:

1. Return on Equity (ROE): Stability Amid Decline

- JLG’s ROE has held steady at ~10.6% since 2023, despite the stock’s freefall. While this may seem low compared to some sectors, it reflects the company’s focus on capital preservation and risk management in cyclical industries like construction.
- The construction sector’s average ROE is typically in the high single digits, making JLG’s performance comparable to peers.

2. Earnings Resilience: A Buffer Against Headwinds

- Despite revenue declines in early 2025, JLG’s net income remains positive, with a trailing twelve-month (TTM) net income of $39.12 million (EPS of $0.14).
- The company’s operating cash flow of $22.79 million and free cash flow of $14.34 million underscore its ability to generate liquidity even during downturns.

3. Dividends: A 50% Payout Ratio, Sustainably Maintained

- JLG’s dividend payout ratio has averaged ~50% over the past five years, ensuring dividends remain covered by earnings.
- The current dividend yield of 4.07% is compelling, especially as the stock trades at a trailing P/E of 16.53, below the construction sector’s average of 17.30.

4. Valuation: Trading at a Discount to Peers

- EV/EBITDA of 6.95: JLG is valued at just 7x forward EBITDA, a staggering discount to its peers like MAAS Group (MGH) at 12x or Worley (WOR) at 11x.
- Price-to-Book of 1.30: Suggests the market is undervaluing JLG’s equity, which has grown steadily despite cyclical headwinds.

Why the Market Overreacted—and Why This is a Buying Opportunity

The sell-off appears driven by two factors:
1. Sector-wide pessimism: Construction stocks have been battered by fears of a housing slowdown and rising interest rates.
2. Short-term revenue dips: JLG’s Q1 2025 revenue fell 6.1%, prompting a 38% drop in net income.

However, these negatives are already priced in, while the positives are underappreciated:
- Strategic U.S. expansion: JLG’s push into U.S. home services and large-loss insurance building projects could unlock new revenue streams.
- Strong insider buying: Directors like Scott Didier and Nicholas Carnell have purchased shares at $2.15–$2.33, signaling confidence in the stock’s undervaluation.
- Low volatility: With a beta of 0.24, JLG’s stock is less sensitive to market swings, making it a defensive contrarian play.

The Case for Immediate Action

For long-term investors, JLG offers a rare trifecta:
1. Safety: A dividend yield of 4% with a covered payout ratio.
2. Value: Trading at 7x forward EBITDA, it’s a bargain relative to its growth trajectory.
3. Catalysts: The U.S. market expansion and a potential rebound in Australian construction demand could re-rate the stock.

The Bottom Line: JLG’s stock has been oversold, and its fundamentals remain intact. With shares near multi-year lows and insiders buying, this is a once-in-a-cycle opportunity to lock in a high-yield, undervalued asset with growth potential.

Final Call to Action: Consider initiating a position in JLG at current levels. Monitor for a bounce post-May 26 earnings release, and set a price target of $3.50–$4.00, reflecting a return to its 2022 valuation.

Investors should conduct their own due diligence and consider risk tolerance before making decisions.