Serviced office provider Servcorp Limited (ASX: SRV) reported a strong set of numbers after close of trading yesterday. Revenue was up 15% to $277.4 million, net profit before tax (NPBT) rose 20% to $41.2 million and earnings per share increased 26% to 34 cents.
Servorp's business spans the globe and so it makes most of its money in currencies other than Australian dollars. Consequently, a sizeable chunk of revenue and profit growth during the period relates to foreign exchange movements. In constant currency terms, revenue increased 9% and NPBT rose 16% compared to 2014.
When Servcorp opens a new office floor, it takes a while for it to reach a profitable occupancy level because it has to pay the lease on the whole floor immediately and invest upfront in IT equipment and office fittings. Therefore in a year when the company opens lots of new floors it will report a lower profit than an equivalent year with no new floors.
To overcome this effect, the company uses like-for-like floors to measure year-on-year business performance. Like-for-like floors are all office floors open in both comparison years, calculated by excluding the contribution from any floors opened in the last year and any closed in the year before last.
On a like-for-like basis, NPBT was up a whopping 36% to $48.2 million. Part of the reason why like-for-like growth was so much stronger than statutory growth is that during the year Servcorp increased its office capacity by 15%, the largest expansion in the company's history.
Management splits the business into four regions for operating purposes which are the USA, Europe and the Middle East (EME), North Asia and Australia and New Zealand and South East Asia (ANZ/SEA). In total the company has 145 office floors with 23 in USA, 38 in EME, 35 in North Asia and 46 in ANZ/SEA. There are three additional floors in a small franchise operation in India.
Seven of a total 10 new locations were opened in EME during 2015 and the region was the star performer on a like-for-like basis with NPBT growing 81% to $19.4 million. Next was North Asia where like-for-like NPBT rose 46% to $17.6 million with management noting that there is room for improvement in mainland China.
In the USA, like-for-like net losses before tax reduced by 29% to $2.3 million despite the extension of three existing floors. Encouragingly, the region was profitable in the month of June 2015 excluding Servcorp's recently opened and largest floor at One World Trade Centre.
ANZ/SEA delivered the most disappointing performance with like-for-like NPBT down 17% to $9.2 million after business was disrupted by a management restructure in Malaysia and Singapore. Both Malaysia and Singapore returned to profitability in June 2015.
Operating cash flows grew 49% to $59.9 million during the year helping the company to increase its unencumbered cash by 6% to $99.3 million after investing $39.8 million back into the business and paying $21.7 million of dividends. This cash pile will be used to take advantage of suppressed prices on long-term leases of office space when industry conditions inevitably deteriorate.
Such is management's confidence in the business currently that it has projected NPBT to rise 16.5% to in excess of $48 million for 2016. Given the major expansion undertaken in 2015, this forecast may turn out to be conservative.
Total dividends declared for 2015 are 22 cents per share with the same guided for next year, placing the stock on a partially franked dividend yield of around 3.5%. Industry conditions will continue to fluctuate but each year Servcorp adds new offices in prime locations to its impressive global portfolio. This bodes well for shareholders.
