Shares of Servcorp Limited (ASX: SRV) have been slammed today after the group lowered its profit guidance via an announcement this morning. After trading for $7.49 to end last week, the shares have since lost 23.6% — almost a quarter of their value – to trade at $5.72.
What happened?
Servcorp is a company that provides executive suites and virtual office facilities around the world. As at 30 June 2016, the company had 5,397 offices (with a forecast to reach 5,800 this financial year) and generated $328.6 million in annual revenue.
The company has grown strongly over the past four years or so, however, its shares tumbled today on a very negative downgrade. After it had advised investors to expect net profit before tax (NPBT) of 'not less than' $56 million for financial year 2017, it now expects NPBT to be around $47 million. That's a downgrade of more than 16%.
The company revealed that, although it had enjoyed a positive trading environment during the first quarter, conditions began to deteriorate during the second quarter. It noted that while its businesses in general continue to perform in line with expectations, "the performance of the USA and South East Asia businesses in particular have been unsatisfactory."
Notably, of the 151 floors Servcorp operated as at 30 June, 22 of those were in the United States, making it Servcorp's third largest market by that measure. That segment also accounted for 11% of group revenue for the year (but generated a loss of $3.8 million, compared to an overall group profit of $47.9 million). Meanwhile, Australia, New Zealand and South East Asia accounted for 27% of revenue and more than a quarter of group earnings (it is unclear exactly how much South East Asia itself generated as it is grouped in with Australia and New Zealand when segment results are reported).
According to the group, the USA business incurred restructure costs with the General Manager having now departed.
On a more positive note, one element of today's results that may please some investors is that the group has increased its dividend guidance for the year to reflect its expectations of greater cash balances in the future. It now expects to pay a 13 cent interim and final dividend (a total of 26 cents per share for the year) compared to the 11 cent interim and final dividends (a total of 22 cents per share for the year) it had previously forecast.
What happens now?
This is clearly a disappointing result for investors, and one that management need to resolve. Indeed, the company is committed to investing in and repairing its US operations, which is highlighted by its decision to relocate its Chief Operating Officer to New York City for the remainder of 2017.
As has been demonstrated today, an investment in Servcorp isn't without risk. Although it is globally diversified, it is still vulnerable to swings in economic conditions in any of the markets in which it operates.
That said, there is plenty to like about the business. While the more risk-averse investors may want to give this one a wide berth, for now, others may want to take the opportunity to give Servcorp a closer inspection while its shares are trading lower.
