As the global economy slowly recovers then perhaps investing in a stock that should benefit from this growth is worth looking at. One such stock is Servcorp, which offers investors exposure to the serviced and virtual office market not only in Australia, but also in number of major cities across the world.
Servcorp (ASX:SRV) provides a range of business related services that allow companies and business owners to establish an office without the burden of having to take out leases, hire receptionists, buy furniture and install an IT network etc. Basically Servcorp provide everything needed to operate an office and clients can also access the company’s facilities not only in the location of their serviced office, but also across the Servcorp global network as well.
In addition Servcorp offers a virtual office solution that allows people working from home for example to have a major city/CBD office address and use Servcorp’s facilities if needed, without the cost of having an actual office at that address. A virtual office can also be set up to help expand a company into other markets within Australia or overseas . A good overview of what the company offers in terms of products and service can be found on the Servcorp website.
In theory as business conditions improve Servcorp should benefit, but like all companies they need to deal with competitors and as I found out when I was looking into serviced offices, there are plenty of alternatives to Servcorp’s solutions out in the marketplace. One of their biggest competitors for example is the older and larger U.K. company Regus (website)
In addition to traditional competition Servcorp needs to deal with technology that now allows people to easily operate a business from home without actually needing many of the company’s solutions. For example it is not that difficult now to set up a high speed computer network in a home office and mobile phones/voice-mail etc. mean people working from home can be easily reached, no matter where they are.
Therefore the company continuously invests in technology so that it can offer solutions that are simply too costly or complex for many businesses to afford or implement.
At present SRV is trading on a P/E of around 9, pays a good fully franked dividend and the company has achieved a ROE (Return on Equity) of over 20% since 2006. In the last 6 months the stock price has benefited from the broad rally across the Australian stock market as can be seen in the chart below.
Servcorp (SRV) 5 year stock price chart (Sep 09)
On the 19th August the company announced a record profit of $47.28 million so it seems they have dealt with the global economic downturn pretty well. In fact although the company expects global trading conditions in 2010 to remain challenging, it is planning to open new offices in a number of overseas locations including in my part of the world Fukuoka, Japan.
The company’s expansion plans will require an upfront investment and so this is going to hit the bottom line over the next year or so. In addition they will need to deal with stiff competition and already they have seen operating margins decrease over the last 6 months.
Servcorp’s global expansion plans are also not without risk and if global business conditions remains tough or even get worse, then they could find themselves with a lot of empty office space and some big bills still coming in.
To get an idea of the roller-coaster ride investors might be taken on let’s look at the SRV 10 year charts versus the All Ordinaries Index.
Servcorp (SRV) vs ASX All Ords 10 year chart (Sep 09)
This chart suggests to me that the Servcorp stock price is now highly cyclical in nature and is very sensitive to Australian business conditions. As the company expands further overseas it will be impacted to a lesser extent by a downturn in Australia, but will be increasingly exposed to global economic conditions and the fortunes of the Australian dollar.
One might expect that the company’s share price will again rise as the global economy picks up, but their overseas expansion plans do add an extra element of risk and this is probably something investors should take into account when looking at this stock.
As always I am not suggesting anyone buy, hold or sell this stock, but it is an interesting company to watch as the global economy edges towards growth again.
The author of this article does not own Servcorp shares.