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#Bull Case
Last edited 4 months ago

Servcorp is a highly cyclical business, and will almost certainly suffer a material drop in earnings due to the coronavirus induced economic slowdown. Sentiment towards these businesses will likewise drop as the market gets a handle on just how big a fall in profits can be, even off a relatively modest drop in revenues (there's a lot of operating leverage in the business).

So you get a brutal one-two punch of a sharp drop in earnings and a lower market multiple. Shares have already ~20% since the crisis started to take hold, but they lost almost 60% in the GFC. So things could easily get a lot worse. 

However, this is a business with a very long and successful history, with a fortress balance sheet and massive insider ownership. It will almost certainly still be around, and profitable, in another 5 years. Even at the worst point in the GFC, SRV remained profitable.

Servcorp has no debt and $76m in cash -- more than 2 years worth of net profits and close to a quarter of its current market cap.

The broader structural shift towards co-working, remote working etc is still very much on track, and (dare I say it) a hugely uinprofitable WeWork may handle the current environment less well. Their virtual office offering, which facilitates working from home, may even benefit from any workplace restrictions.

Alf Moufarrige, who already owns 52% of the business (around $180m worth), purchased a further $800k worth of shares on 3/3/20 at $4 each.

Shares are on a 6% partially franked yield. However during GFC dividends halved and took 5 years to recover (see below). So the actual yield may well be lower if things continue to deteriorate. Still, a 3-4% yield is nothing to sneee at in the current climate.

The reason this is interesting is that I think it is these types of stocks that represent the best potential for gain when we come out the other side of the current crisis -- whenever that is. You get the bounce back in earnings and the market multiple expands as confidence returns. 

As an example, shares climbed 4x higher in the years after the GFC.

I'm not a buyer just yet, but I think it's an interesting to one to watch.

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