Servcorp: Result 2012
Recommendation
Most of Servcorp’s 21 floors in the US have been open for less than two years. While its business there remains a work in progress, it’s fair to call the US leg of the company’s expansion an early disappointment. This isn’t a huge surprise; we’d warned in Servcorp’s American adventure on 27 Aug 10 (Long Term Buy – $3.02) that the US would be a difficult nut to crack.
It hasn’t been a disaster, as managing director Alf Moufarrige was keen to point out at yesterday’s results presentation. The US business isn’t huge in floor-space terms, although it still produced a loss of $10.9m in 2012 (down slightly from $11.7m in 2011). Management also kept much quieter about Virtual Office this time; it’s clearly not achieving initial expectations.
Overall, Servcorp’s total revenues rose 10% to $201m. Higher profits from its South East Asian, Japanese and Middle Eastern businesses helped to offset the US losses. As a result, net profit rose six-fold from last year’s depressed levels to $14.8m. As expected, a final dividend of 7.5 cents was declared, franked to 85% (ex date 14 Sep).
Full year to 30 June | 2012 | 2011 | Change (%) |
---|---|---|---|
Revenues ($m) | 200.8 | 182.1 | 10 |
Mature floor profit before tax ($m) | 37.3 | 31.0 | 20 |
Immature floor losses ($m) | 19.0 | 28.0 | -32 |
Net profit ($m) | 14.8 | 2.5 | 492 |
EPS (c) | 15.0 | 2.5 | 500 |
DPS* (c) | 15.0 | 10.0 | 50 |
Franking (%) | 68 | 100 | |
* Final dividend 7.5 cents, 85% franked |
Like profit, operating cash flow is improving—from $19m in 2011 to $32m in 2012. This easily funds floor rollouts—11 are planned this year—and the 15 cent (fully franked) dividend forecast. With higher cash flow expected in 2013, management is planning a 5% share buyback to utilise the company’s $96m in cash. But low stock liquidity means the company might have trouble acquiring many shares.
The profit recovery is unfolding as expected, except in the US. So the company’s 2013 guidance—a net profit after tax of approximately $20m—is a little lower than we originally expected.
Absent worsening economic conditions—particularly in the highly profitable Australian business—the cash-generating ability of the Servcorp business will become more obvious this year. On a prospective 2013 free cash flow yield approaching 10% (even with the US underperforming), the stock doesn’t look expensive. The share price is up 2% since 22 Feb 12 (Long Term Buy – $2.85) and remains a LONG TERM BUY.
The model Growth and Income portfolios owns shares in Servcorp.