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Is the Servcorp Limited share price a bargain or value trap?

Shares in shared workspace provider Servcorp Limited (ASX: SRV) are down 28% over the course of 2017 as the global group starts to feel the heat from rising competition.

At the end of January 2017 the group warned full year profit before tax was expected to come in at $47 million, compared to prior guidance for not less than $56 million, with the big downgrade blamed on “challenging” conditions encountered in the U.S. in particular over the final quarter of 2016.

Servcorp has in the past dismissed the rising competitive threat from innovative shared workspace business WeWork, although I suspect the fast-growing U.S. giant is now starting to eat into its market share.

WeWork is now valued at US$10 billion and is the poster-boy for the new shared workspaces of bean bags, T-shirts and beer on tap, with the locations, interior design, and trappings of modern corporate workplaces.

It has been growing like gangbusters and recently opened two coworking office spaces in Sydney’s Martin Place and Pyrmont, as well as moving into Servcorp’s other operating markets around Asia.

However, it’s not just WeWork trying to leverage the fast-growing demand for co-working spaces that is supported by the rise of internet technologies and cloud services. Cut price competitors are everywhere for Servcorp and its outlook is challenged in my opinion.

Still this is a founder-led business with an excellent track record that is sitting in something of a co-working growth sweet spot, so the challenge is largely around whether or not it can retain or grow its market share.

The group is also debt free and at $5.61 on 14x trailing earnings per share of 40 cents, with a relatively low payout ratio around 54% of earnings.

As a bonus the group is forecasting total dividends for the full year ending June 30 2017 will be 26 cents per share, which places it on a yield of 4.6%.

Recently powerful institutional investors have been delivering their mixed verdicts as to the outlook for Servcorp, with Commonwealth Bank of Australia (ASX: CBA) and Perpetual Limited (ASX: PPT) selling down their holdings, while BTT Investment Management Ltd (ASX: BTT) has been increasing its position.

Indeed, it’s not hard to make the bull case for Servcorp shares, but then again it’s not hard to make the bear case either and the stock could be a bargain buy or value trap at today’s prices.

For now, I’m not a buyer of shares due to the competitive threats and because there may be superior risk-adjusted returns available elsewhere.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

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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