Servcorp Limited reports: Here’s what investors should know

Credit: U6 Studio

Serviced office company Servcorp Limited (ASX: SRV) reported rising revenue and profit in 2016. Revenue rose 18.5% to $328.6 million and net profit after tax was up 29.9% to $39.7 million. The results were aided by a weaker dollar and so revenue rose by 10% and NPBT rose 16% when expressed in constant currency.

Average floor occupancy was slightly lower at 75% compared to 76% last year and fell to 77% from 79% on a like for like basis. This is a worrying sign as high-fixed costs mean that profitability is very susceptible to changes in occupancy levels.

The company continued to lay the foundations for future growth by opening 381 offices in 2016 adding 7% to group capacity. It invested $27.6 million in total, but did not use any of its substantial cash pile which remained steady at $99.7 million.

In the ANZ and South East Asia segment, revenue was up 7.1% to $87.1 million and net profit before tax (NPBT) rose 38.6% to $12.2 million. Australia and New Zealand occupancy is over 80% but Malaysia and Singapore underperformed in 2016. The company plans to open two new floors in Sydney and Jakarta in the first half of 2017.

North Asia recorded 17.4% growth in revenue to $105 million and an 18.2% rise in NPBT to $20.8 million. China was profitable but fell short of management targets. One new floor opened in Osaka during the year and another opened in Tokyo shortly after the end of the period.

The Europe and Middle East segment saw revenue grow 27.2% to $93.4 million and NPBT increased 19.4% to $18.5 million. All markets performed well with the exception of France. Servcorp opened new locations in Abu Dhabi and Bahrain during the year.

United States revenue was up 41.5% to $35.1 million but the division made a loss of $3.8 million during the year compared with a loss of $5 million last year. The operation is yet to make a profit since opening its first office in 2010 and investors will wonder whether expanding into the US was a wise move. Occupancy is below the group average and management will hope that the planned opening of a large floor in Chicago in the second half of 2017 will help turn around the division’s fortunes.

Servcorp is targeting NPBT of at least $56 million in 2017, 15% above the 2016 result and aims to grow capacity by a further 7% during the year. The company declared a final dividend of 11 cents bringing the total for the year to 22 cents and so the stock trades on a dividend yield of 3.1% at current prices.

Servcorp has an enviable portfolio of offices located in premium global locations. Its extensive geographic footprint is important for its virtual office product which made up 25.6% of total revenue in 2016 and allows clients to access any global location for a monthly fee.

Businesses use Servcorp’s offices because the company offers flexible lease terms and a fully managed service. However, short leases can also mean that revenue quickly evaporates when economic conditions deteriorate. This happened most recently during the GFC and so in my view although Servcorp is a good quality growing company, it is probably best to wait until the next downturn before buying shares.

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Motley Fool contributor Matt Brazier has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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