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Should you buy Servcorp?

What’s not to like about a company whose directors and management are depicted as aliens, aviators and butterflies in annual reports? Such is the case with Servcorp (ASX: SRV), a serviced office provider operating in 21 countries.

After finding it difficult to obtain a small office in 1978, Alf Moufarrige decided to take a whole floor and set about subleasing. Servcorp was born. Servcorp is now the world’s second-largest office provider, has superior proprietary IT, offers a depth of service options and recently undertook a major expansion into the US.

Moufarrige has one of the most expressive faces in business circles and clearly relishes his work. It’s a joy attending the AGM – plenty of beer, champagne and good treats available. Servcorp is all in the family with Alf as CEO and his son Marcus serving as chief operating officer. Family vehicles own over 50% of the company. Sometimes this works out very well for investors, and I believe this is the case with SRV. Line management is effectively decentralised into geographies and staff turnover is low.

At current prices ($3.50), Servcorp has a market cap of $345 million, a 2013 PE of 17, a  4.3% yield, no borrowings and $99 million in cash. It looks fully valued, however what will have these shares whistling is the inevitable realisation of its embedded potential.

Serviced offices need two to three years to find their feet – at present, 29% of Servcorp’s floors are immature and contribute nothing to profit (although many are cash positive). As leases for a substantial number of these floors were negotiated at a low point in the commercial real estate cycle occupancy, costs are extremely competitive, especially in the US. These factors alone suggest that a substantial rise in profit can be expected over 2014 and 2015.

In addition, improved financial performance is likely from mature floors as economies recover and the Aussie dollar declines.

Foolish takeaway

Whenever prospecting, a Fool should look at industry dynamics, management ability and enthusiasm, competitive position, financial capacity and future unrealised value in the price. On a medium term view, this Fool believes Servcorp ticks the boxes and is worthy of further consideration.

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Motley Fool contributor Peter Andersen owns shares in Servcorp.

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