Wednesday, July 9, 2008

Your Serv

I am writing about Servcorp (SRV). SRV is a company listed on the Australian Stock Exchange. It operates serviced offices throughout Australia, Asia, Europe and the Middle East. It has no exposure to the US and the UK.

Basically, all that SRV does is that it takes out long term leases of whole floors of office space in prime locations, fit them out, and then rent them out, usually on a short term basis.

The founder, Alf Moufarridge, owns over 60% of the shares on issue. His two sons and daughter are in key positions in the company. This is both a comfort and a concern.

There are various competitors, notably the Regus Group. SRV aims to make itself special by developing proprietary technology to provide business solutions to its customers.

The company is conservative, and has a pile of cash with no significant debts. It has probably close to AUD$1.00 per share in cash. The business throw out lots of surplus cash, and capex requirement, after fitting out of floors, is minimal.

As at 9 July 2008, the market value of SRV is AUD$268m. Strip out cash of $80m, and you have a business going concern for $188 m, which is earning net profits after tax of about $30m per year.

Looks terribly attractive, so what has gone wrong? Well, perhaps being lumped into the property sector classification is doing it no favours, especially with publicised problems with GPT, another listed property trust, although this would really be comparing apples to oranges. Perhaps other shareholders are getting concerned with the previously proposed option packages to the Moufarridge juniors.

What could happen from here?

Well, it continues making heaps of money from the booming Middle East, Hong Kong, Singapore and China markets, holds itself steady in Japan, does okay in Europe, and have a slight decline in Australia. It throws off more cash, opens more floors in booming economy locations, such as perhaps China and India.

What could go wrong?

Well, the world economy falls off a cliff, killing demands for serviced offices, leaving SRV with half empty floors across Asia, Australia, and the Middle East, which it pays about AUD$1m per floor as fixed rent every year, increasing each year based on inflation indexation. AUD$80m in the bank is a good enough buffer for perhaps 2 to 3 years, so a prolonged 4-5 year downturn will hurt badly, although by then most of the leases would have expired.

Or, Mouffaridge juniors get caught up with white elephant ideas, and divert resources to developing technology which the market does not want.

Of course, I do not know how this will play out, but I do not see the world economy falling off a cliff. Declining economic environment perhaps ironically may increase the demands for serviced offices as entrepreneur and start ups shy away from long term lease commitments.

Just a blog for the record, and I can revisit this later on to check any reasoning errors.

Disclosure: I am long SRV.

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