Servcorp Limited (ASX: SRV) sells serviced and virtual offices in exclusive locations across 52 major cities around the world. The company continues to open new floors, growing capacity by around 10% per year. As Servcorp expands its global footprint, it becomes both more profitbale and less susceptible to regional economic downturns.
Customers of Servorp are businesses that do not want to commit to office leases for several years nor have the hassle of installing IT equipment. Servcorp invests heavily in IT because provision of cutting edge technology is one of its competitive strengths. Another is its ability to offer customers a presence in the best locations in the world.
The virtual office business particularly benefits from this strength because Servcorp can offer customers a large choice of locations when booking meeting rooms for one-off use. This is a significant barrier to entry because only a company with a similar global presence can provide an equivalent service.
Price Chart
Long-term price charts often tell a story about the performance of a business because price follows value over the long term.
Looking at the price chart of Servcorp, there are two clear troughs, one in 2003 and another at the turn of 2009. These troughs represent the impact of the Global Financial Crisis in 2009, and weak industry conditions present in 2003. They indicate that Servcorp is operating in a cyclical industry.
As discussed in this article, investors need to consider average profit and cash flow figures through the cycle when valuing cyclical businesses. This is straightforward when looking at stable, mature businesses, such as Insurance Australia Group Ltd (ASX: IAG) or QBE Insurance Group Ltd (ASX: QBE), but tricky when considering a younger, growing company such as Servcorp.
Management
Servcorp's CEO, Alf Moufarrige, owns over half the company and is an astute businessman. He bravely launched a global expansion program in 2009 at the height of the GFC. Servcorp took advantage of cheap prices at this time when many offices were vacant. The benefits of this decision are yet to be realised given many offices opened since 2009 are yet to reach profitability.
Further evidence of the ability of management is present on the company's balance sheet. Growth has been achieved without the use of debt, and there is $100 million in cash available which will protect the business in the next down cycle. A strong balance sheet is the hallmark of a sustainable growth story and far too many listed growth companies fail to meet this criteria.
Foolish takeaway
Servcorp belongs to an elite group of listed companies experiencing strong growth, with impressive management and a sustainable competitive advantage. It is the goal of investors to buy such a company for a reasonable price and hold it for the long-term. Whilst current prices are not cheap, they are reasonable and it may be some time before better prices are available.
