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Stockwatch: Servcorp Ltd (SRV)

September 29th, 2009 · Greg Atkinson · 8 Comments

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)

servcorp-5-year-stock-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)

servcorp-vs-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.


8 responses so far ↓

  • 1 Anon // Oct 12, 2009 at 8:59 am

    Well, another dilution ! I had WFL last week now SRV this one. I am not impressed when I see dilutions. However over their last 10 years their shares outstanding have largely remained the same.

    “Trading for the first two months of 2010F continued to be very difficult. The financial impacts of the
    new expansion plan means there will be a drag effect on profits into the medium term.”

    “Servcorp intends to implement an expansion plan which will target on opening more than 100 new
    floors
    over the next 3 to 4 years, the vast majority of which will focus on the Virtual Office model.”

    “Over the next 3 to 4 years, Servcorp is expected to expand at a faster rate than it has historically. The
    larger number of immature floors is expected to have a material negative impact on profitability until
    the new floors reach maturity.”

    “Today, Servcorp operates in 13 countries, with 67
    floors.

    Usually when growth is done too quickly this isn’t a good sign. Its going to tripple its floors. If the economy doesn’t pickup as much as expected this is going to be a disasterous strategy regarding their cost base.
    Pe is now approx 11-13 post dilution. Then if we factor in a medium term drag on profitability we could be above 13-15+ (best case scenario…worst case 17-20+) Historical valuations max have been 15-20 but with significant growth in forward eps. This will trade around 8-10 if eps goes backwards/ growth is slow/flat for the medium term.
    I am dumping my holdings (above $4) as longterm growth looks unreliable and dividend growth may not be assured.

    Hey just a side issue – above not advice, only for debating – pls see a financial advisor for decision making and advice.

  • 2 Anon // Oct 12, 2009 at 2:45 pm

    Examples of companies expanding too quickly:

    ABC Learning

    Centro

    IINET

    Babcock and Brown

    I have never seen a company, of this size, essentially triple its operations (in a few years) and avoid an eventual implosion on themselves.
    I thought they were going to have an ambitious growth strategy – not a “go for broke” one !
    I really hope it works out…if they can pull this off there is good potential here. I prefer lowest risk of capital loss (and safety of dividend) as opposed to high risk high reward, so this investment has gone out of my risk tolerance capability.
    I may well re-enter if and when Servcorp prove they are capable of rolling this long term strategy out. Until then, I will remain skeptical and stay on the sidelines.

    Hey just a side issue – above not advice, only for debating – pls see a financial advisor for decision making and advice.

  • 3 Greg Atkinson // Oct 13, 2009 at 7:41 am

    Anon I suspect Servcorp might be feeling pressure to add more overseas locations to keep up with it’s competitors, the question is will these extra locations bring home the money or become a liability over the next few years? I think you would have to be very optimistic to believe they will be money makers the day they open so your comments seem pretty valid to me.

  • 4 Anon // Oct 13, 2009 at 8:04 am

    Hey Greg, good to see you back 🙂 So do you live in Japan? Or is it just your favourite part of the world ?

    Cheers for the recog.

    “the question is will these extra locations bring home the money or become a liability over the next few years?”

    Thinking about this more overnight, I am more unsure as to how the market is going to price this. Will they price the growth in the future now or wait until its proven? The institutional placements were well received.

    Not sure whether to unload my full position or partial. I guess I have time to ponder, theres scarce liquidity this morning!

    Hey just a side issue – above not advice, only for debating – pls see a financial advisor for decision making and advice.

  • 5 Anon // Oct 13, 2009 at 8:14 am

    Institutions are likely to push this up to protect their entry price. Will think about things abit more before I act.

    Hey just a side issue – above not advice, only for debating – pls see a financial advisor for decision making and advice.

  • 6 Greg Atkinson // Oct 13, 2009 at 4:24 pm

    Anon I live in sunny Japan these days. As for as SRV I am merely an observer, I have no interest in the stock myself.

  • 7 Anon // Oct 13, 2009 at 5:59 pm

    Hey nice place to live, especially if you’ve bght a house at the real estate lows of the next generation !

    As for Servcorp:
    I will hold for now, but wont takeup rights. I guess a positive is at least they are being aggressive at the bottom of the cycle. Most of the implosions I mentioned previously occured from aggressive expansion towards the end of the cycle. Also obviously they wont be using debt.
    However the cautions mentioned earlier are real and need to be monitored.

    Hey just a side issue – above not advice, only for debating – pls see a financial advisor for decision making and advice.

  • 8 Plornt // Aug 7, 2010 at 2:46 pm

    Servcorp, which I no longer hold as I exited cyclicals before the crash and warned people many times cyclicals were going under before they fell 30+%, has not done well at all.

    From Oct 12th 2009.
    SRV ~3.10 down 25%.

    All posts by this poster is not financial advice or a reccomendation to do something. Can change my mind quickly on any decision I make, given markets always change. Have positions in instruments discussed unless otherwise indicated.

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