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.

Well before We Work was ever concieved, Servcorp pioneered the shares office concept and (despite recent weakness) has a long history of shareholder value creation.

Essentially a 'lease arbitrage' model, the company leases long term at lower rates and rents this out at higher rates. There appears to be a real structural shift towards more flexible office arrangements, and the industry as a whole is seeing a big increase in demand.

It operates 155 floors in 52 cities across 24 countries, including Japan, the UK, the Middle East and the US.

The company has a huge cash balance, currently around $80 million and no debt. Cash represent close to 20% of the total market capitalisation.

Last year it generated over $62m in free cash flow. It is a reliable dividend payer, and expects to pay out 20cps in FY20 (representinga forward yield of approx 4.7%, partially franked).

The business had made significant technology investment, which it boasts is better than WeWork's.

Servcorp is ~50% owned by the founding family, with the Patriach Al still very much holding the reigns.

Investors should be mindful that the business is highly cyclical, and has a high rate of churn amongst customers. In an economic downturn, profits tend to take a huge whack due to the operating leverage. (although given the strength of its balance sheet, it can easily withstand any slowdown).

It has also had a lot of difficulty in the US market, which is still loss making. The 'irrational' competition of others in this space that have less interest in near term profitability is one key factor.

At the current price ($4.23), it is on a trailing PE of just 14.

With WeWork on the ropes, it could be one to watch.