A company still misunderstood

FY 25 was again a story of significant growth :
. + 11 % for revenues (to 349 m$),
. + 36 % for NPAT (to 53.1 m$).
There were significant one offs*, but the cumulated effect was + 0.3 m$ vs - 2.2 m$ in FY 24.
So, if we correct from these one offs, NPAT increased by 28 %.

Main drivers of their revenue growth (+ 11 % and + 9 % on constant currency) after + 7 % in FY 24 and FY 23 :
. + 4 % from increase in office space,
. + 4 % from price increase,
. the rest mainly coming some forex impact.

Margin drivers :
- once again, services revenues increased more than lease revenues (respectively by + 14.5 % and + 9.9 %),
- no margin increase for the lease business (+ 11.9 % for current cash rent paid, higher than lease revenue growth),
- but margin increase again for the services business (+ 11.8 % for services expenses).

These good results were fully reflected in the cash flow from operation : + 16 % to 191.8 m$.
Statutory free cash flow increased by 75 % to 47.7 m$.
It corresponds to a free cash flow yield of 9.3 %.
There is still a significant difference with what the company calls "the underlying free cash flow" of 84.9 m$.
(their definition of free cash flow is a bit strange as it is calculated before tax and does not include any Capex).

My favourite way of looking at free cash flow : just using maintenance Capex (if not disclosed, using depreciation for PPE).
So my estimate of free cash flow is 57.3 m$ (vs 45.3 m$) and represent a free cash flow yield of 11.2 %.

Apart from price increases, the success of the company can be measured by its ROE of 22.7 %, despite a high level of net cash (half of their equities). Return on capital employed (after tax) is 52 %.
This level of return is surprisingly high for a leasing business, with no financial leverage. It is mainly due to the fact that Servcorp is not owning many office space (mainly leasing from landlords).

After stabilising their office capacity between FY 16 and FY 24, they have continued to increase their capacity in FY 25, focusing on the highest growth/margin region (Europe and Middle East). Capacity increased by 4 % after + 3.4 % in FY 24.
They expect to further accelerate their growth in FY 26, increasing office capacity by 8 %.
The growth is well under control, as it is organic only and the company does not hesitate to close underperforming office capacities.

Looking at their results by geographic area :
- all areas increased their revenues and profit (from continuing operations),
- Europe and Middle East**** continue to be the main driver (+ 18 % for revenues and + 42 % for profit). Partly due to capacity increase.
It represents now 55 % of profit.
Overall, this performance looks really strong, as they still struggle in the 2 main economies (just BE in the US** and loss making in Greater China), the performance is mainly supported by their strong performance in the middle east and Japan.

One thing where I disagree with the consensus about Servcorp : the level of risk.
It is lower than discounted by the market, looking at several elements :
- the track record of profit,
- the beta of the stock (0.56 according to Yahoo Finance),
- and the large net cash position (their competitors have usually a high level of debt).

Since its IPO in 1999, the global co-working market has been disrupted by 2 major events :
- the foundation and development of WeWork from 2010,
- the arrival of new competitors between FY 16 and FY 18.
In both cases, Servcorp has been initially severely impacted, but has been able to adapt and showed later a regular growth (after the initial impact).
Servcorp may also have been victim of its own decision to increase its capacity by 50 % between FY 13 and FY 17.

Also interesting to note that they mainly work with start up and small companies, where the risk of default may be quite high.
They seem to have managed quite well this risk, looking at their past results.
Anyway, interesting to see what happened in FY 25 when they accelerated their growth : the level of trade impairment*** increased from around 1.8 m$ to 5.7 m$ (or 12 % of trade receivables).. Probably one reason why the company is quite cautious about its level of business growth.

Overall, the company has a very high level of return and still a significant potential of growth*****
The only question is only the stability of this growth (which is probably quite subjective).


* 3 categories : foreign exchange gains, net impairment of non financial assets and net other gains.
** US is the only country where they struggle structurally, while China weakness seems more cyclical.
*** "trade debtors with government authorities are excluded from the expected credit loss rate calculation as these balances are considered to carry minimal credit risk".
**** based on the disclosed elements, their high margin in EMEA is explained by a high productivity (revenue/employee) and a high level of services in their revenues (37 % vs 21 % to 25 % in other geographic areas).
***** according to a recent presentation of the global leader (IWG), the total market size can be estimated at 2 tr USD. So Servcorp has a market share of 1 % vs 10 % for IWG.