Servcorp

If you want a clue as to how the global economy is doing, you’ll find it in Servcorp’s expansion program. The company was originally planning to open up to 15 floors in 2012, but has scaled that back to nine. The tough climate means that newly opened floors are taking longer than expected to become profitable. Out of the company’s 47 immature floors, only two—London and Jeddah—began producing profits in the half.

Despite this, the company reported a decent result in the first half of 2012. Revenue rose 11% (or 16% in constant currency terms) to $99.4m, while net profit rose from around breakeven to $6.4m. Mature floor profit before tax increased 37% to $18.5m while immature floor losses fell 22% to $10.4m. As expected, the interim dividend was lifted 50% to 7.5 cents, franked to 50% (ex date 1 Mar).

Most regions improved. Australia was consistent, while Japan staged an impressive turnaround. China, Southeast Asia and the Middle East all reported significantly higher profits. But Europe reported a small loss—again—and the 21 floors in the US lost $6.1m. We’re hoping for a significantly improved result from the US in 2013, but the economy remains difficult and major competitor Regus isn’t making life easy.

Management stuck to its forecasts of $37m in mature floor profits and $20m in immature floor losses for 2012. Both figures seem achievable based on the results in the first half although, at the results presentation, chief executive Alf Moufarrige said it all depends on a strong fourth quarter.

Servcorp’s share price has risen 4% since Riding the Servcorp escalator from 17 Oct 11 (Long Term Buy – $2.75). The story is on track after the first half results and, once the economy improves, this should be an enormously profitable company. LONG TERM BUY for up to 3% of most portfolios.

Note: The model Growth and Income portfolios own shares in Servcorp.