As we saw yesterday, shares in managed office provider Servcorp Limited (ASX: SRV) took a plunge after management downgraded their profit before tax forecast, after recently upgrading it not long ago.
With shares now 16% lower and valued at around 15x last year's earnings, I feel Servcorp is an interesting opportunity for investors. Founder-led, the company has a strong balance sheet and management with a long track record, including through the GFC.
The decision to increase the dividend payout ratio could be a reflection that further heavy investment in new offices is unlikely, and thus growth could be slower in the near future. Certainly with weaker operating conditions in South-East Asia and the USA that would already appear to be the case.
Servcorp is a cyclical business, with weaker economic conditions resulting in a disproportionate hit to earnings as a result of high fixed costs. The transition to 'virtual' offices could help ease this over the next few years but the fact remains that Servcorp will be hit hard in a downturn.
With lower growth apparently on the cards, investors are left with the asymmetrically larger downside risk to profits if we are witnessing the start of an economic downturn. I take my hat off to management for not blaming the downgrade on Brexit or the US elections, which have been the scapegoat for many weak performances recently.
At today's prices, I consider Servcorp reasonable value and attractive for the dividends – which will be a quarter bigger than last year and could grow further – but not a standout buy.
