Servcorp fills the floors

Positive outlook for this serviced office provider.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Motley Fool contributor Peter Andersen owns shares in Servcorp

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »