Servcorp warns again
Recommendation
Servcorp has slashed its guidance for profit before tax for the 2018 financial year from $45m–55m to $30m–35m. The new figure includes $6m of one-off expenses, but still represents a fall of about 20%, and it's a little unnerving that the company's guidance could be this far off the mark.
Management also said it had decided not to proceed with the growth initiatives it announced at its half-year results presentation in February.
Trading conditions are patchy, as ever, with the UK and Japan ahead of forecasts and Singapore and Saudi Arabia behind. The US, however, remains the big headache and founder and chief executive Alf Moufarrige has headed over there this week, to work with son and chief operating officer Marcus ‘on further strategies to turn the business around'. An update will be provided at the full-year result in August.
Often the time to buy cyclical companies is when the price-earnings ratio is relatively high, on impaired earnings. And with the stock priced on a multiple of about 15 times this year's expected earnings, even after falling 9% since the announcement, we might have both. The trouble is that to buy a cyclical you have to anticipate a turnaround and there are no signs of one at present.
There's much to like about Servcorp, though, including its impressive owner-management, 23% return on capital employed and $106m of unencumbered cash. We're going to take more time to look at the situation and we're removing the price guide while we do so. We'll aim to reinstate it at the full-year result, if not before. In the meantime, we're notching down our maximum recommended portfolio weighting to 4%, but recommend that you HOLD.