MENU

Servcorp fills the floors

Led by the redoubtable and energetic duo of CEO Alf Moufarrige and COO Marcus Moufarrige, Servcorp (ASX: SRV) has invested heavily in the business over the past four years and now has 132 operating floors in 32 countries.

A major initiative has been establishing a significant presence in the US. The capital expenditure involved in doubling capacity has been a drag on earnings and the company is about to reap what has been sown. Wednesday’s AGM provided a rundown on the current state of play.

Australia & New Zealand (30 floors)

Sydney grew in the first quarter of FY 2014, although resources-focused Perth continues to remain difficult. Management and marketing changes are expected to lead to modest improvement in the current financial year. Overall domestic business activity remains at a low ebb.

United States (22 floors)

The move into the US is beginning to pay off – positive cash flows are being achieved and occupancy rates are high. The challenge now is to increase margins, and the first quarter of FY 2014 has been very strong. Servcorp entered the US market soon after the GFC and was able to lease space on very attractive terms. From a standing start in 2010, it looks like Servcorp has cracked the notoriously difficult North American market.

Japan (21 floors)

Japan has been a good place to be in over the past 12 months and operational results from here are going gangbusters. Long established in Japan, Servcorp is benefiting from its reputation for market-leading communications and technology platforms.

Middle East (14 floors)

Dubai and Abu Dhabi are showing strong growth and overall results for this region are very positive.

In addition, 26 floors in Asia and China are performing to budget, although there is patchiness between different economies. For example, Thailand is going very well and Malaysia is a little subdued. China (including Hong Kong) has been quiet, largely due to excess office space  (mainland) and numerous small operators moving into the business.

Twelve floors in Europe (including the UK and Turkey) are showing positive signs of recovery with the UK as a standout and Turkey lagging.

As an aside, Servcorp is not a takeover prospect, with Alf Moufarrige categorically stating that his “shares were not for sale”. Judging by demeanour, it is easy to surmise Alf Moufarrige is not for retirement either.

Foolish takeaway

Servcorp has built critical mass into a number of improving economies and is one of my favourite investments. For another take, check out Motley Fool contributor Claude Walker’s excellent recent article.

Servcorp is conservatively financed and retains an unencumbered cash balance of $93 million as of 30 September 2013. With a constant focus on business quality and operational cash flow, growth has been organic and supported by equity issues rather than debt. Allowing for the cash component, it could be argued Servcorp’s underlying business worth is not recognised by the market.

With a share price of $4, Servcorp is selling at 16 times projected 2014 earnings (adjusting for the 2013 change in depreciation rates to industry norms) and a partly franked yield of 4.5%. In my Foolish view, Servcorp will realise significant value for shareholders over the medium and long term.

3 More Great Investment Ideas

The Australian Financial Review says "good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit." Get "3 Stocks for the Great Dividend Boom" in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

Motley Fool contributor Peter Andersen owns shares in Servcorp

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.