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Servcorp Limited (ASX:SRV) reports profit down 75%, is it a buy?

This morning, serviced office provider Servcorp Limited (ASX: SRV) reported its annual result for the 12 months ending 30 June 2018 showing that revenue was down 5% to $314.4 million.

In constant currency terms revenue was down by only 1%. The company said that the flexible workspace industry has seen unprecedented change, with commercial real estate experiencing significant disruption bringing new competition & challenges.

Like for like floor occupancy was 72% at 30 June 2018, down from 74% at the end of FY17. All floors occupancy was also down 200 basis points to 71% at 30 June 2018.

The USA segment was a key detractor from the result, excluding the USA like for like performance was flat compared to FY17.

Servcorp reported that net profit before tax (NPBT) was $32.1 million – 33% lower than FY17. This includes a one-off $5.8 million strategic initiative expense.

Net profit after tax (NPAT) declined by 75% to $10 million. A $13 million non-cash adjustment relating to the USA deferred tax asset following the USA Federal corporate tax rate reduction was the main culprit for the large decrease. Earnings per share (EPS) declined by just over 75% to 10 cents per share.

Pleasingly, the full year dividend was maintained at 26 cents per share. Management also provided a forecast that the FY19 dividend would be 26 cents per share too.

Operating cash flow fell by 8% to $50.1 million and cash on the balance sheet declined by 10% to $97.1 million.

Outlook

Servcorp believes that global flexible workspace will grow from 5% of all commercial real estate to 20% in the medium-term. In FY19 alone Servcorp estimates it will add around 7.5% capacity including the first location in Germany. Servcorp wants to be the premium provider in a more mainstream industry.

The company’s Board forecast that NPBT will be between $34 million to $40 million in FY19, representing growth of approximately 6% to 25%.

Foolish takeaway

Based on a 26 cents per share full year dividend Servcorp offers a partially franked dividend yield of 6.4%.

This yield is attractive in this low-interest era. However, it seems as though the industry is about to get a lot more supply and demand. If the supply is installed first then Servcorp could face price competition in the shorter-term.

Servcorp is an interesting business, although it is not in a sector that really aligns with my own style of investing.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Servcorp Limited. 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 Scott Phillips.

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