Company Interview / Servcorp serves up 253% profit jump

Key insights:

Servcorp's successful financial performance despite global economic challengesServcorp's successful adaptation to remote work trendFuture growth opportunities for Servcorp in Asia, UK, US and China

Alf Moufarrige, CEO of Servcorp (ASX:SRV), shares insight on the company's successful financial performance, its operational adaptation amid the work-from-home trend and the future growth opportunities. Despite the challenging global economic conditions, Servcorp posted a commendable 253% rise in profits, with expectations of continued growth in the coming year. Alf accredits this success to the company's unique infrastructure, which provides small businesses with a robust platform, global presence, and supportive operational resources.

Reflecting on the impact of the COVID-19 pandemic on business operations, Alf illustrates how Servcorp was ahead of the curve with its work structure. He states that the company has always enabled seamless transition from office to home, concealing the real workspace from clients and partners. Emphasising that the majority of their clients work three days from home proves that Servcorp is capable of adapting to the present landscape of remote working.

Assessing the global standing of Servcorp, Alf spotlights Asia, specifically Japan and the Middle East as regions with substantial growth. He hints at new operational developments in the UK, owing to its less bureaucratic environment. Despite challenges, Alf iterates the company's commitment to enhance its presence in the US and China, citing potential profits and market size. Alf's vision of future growth opportunities reveals an ambitious plan, backed by Servcorp's proven resilience in navigating the changing business landscape.

Full unedited transcript:

0:11

Last week. Works by solutions provide a service for posted a 253% rise in profits to just shy of $40 million, total revenue increasing 7% to more than 300 million cash reserves, also rising by 18%. It paid out a final dividend of $0.13 a share, total dividend of $0.25 a share. That's up 14% on the previous corresponding period, and the company expects to keep increasing them next year. It's also reorganized its operations in the Middle East and may even list there next year.

0:45

Shares are up 1% off the back of those results. Let's get into some of the detail. Optimal voltage is the Served Corp chief executive. He joins us now. Welcome back to auspice. Thanks for joining us. How would you describe the result given I guess the deterioration we're seeing globally in macro conditions. You've been pleased with what you've done.

1:12

I think that certain groups are different product, and it's always been fairly successful in this space. And it's probably because it

1:23

doesn't let space everybody works out. Um, what our office vacancies are, but specifically was started to provide a platform for small businesses. So they had all of the same underlying infrastructure of a big business. They had in-house IT guys. There was always a team you could delegate to. There was somebody to answer your phone, and then you had a global presence so that you could go to London, Paris and New York, by Riyadh or wherever, wherever business is done in the world. And there'd be a surf court location. So

2:00

building it to make it easier for small businesses and branch offices would simply because I had a business which wasn't in space, it was in property. And I needed, um,

2:14

to have the perception that I had strength. And so I moved to the MLC center and took half a floor. And, uh, I had to sublet 16 offices just to pay the rent. And of course, that's grown. And now we've got 50,000 clients.

2:32

Now, personally, that's gone.

2:36

Personally, I think that everybody else is doing it to try and protect that the market cap of their building. And, um, they haven't yet worked out how to run the business, the churn rate. And while Citigroup's net profit appears up 153%, if you look at the real underlying position itself. Corp um, I look at the operating profit on a per on geographic areas. It's up about 20%. And and continuing to grow. So it's a pretty solid result. It's it's not the 153% net profit after tax that you look at, because there were some write offs that came back and lots of things. But but it's growing and we've got $120 million in cash. That's about where we're at.

3:26

Given the, uh, well, since Covid, obviously the, uh, work from home phenomenon. How has your company negotiated this? Uh, because, of course, many people are still working from home. How has that actually affected your business? I mean, that was our base.

3:44

So, of course, people underestimate this little Aussie company. I mean, we wrote the book. In fact, we were the first guys in the world to do virtual office and coworking. So 40 years ago we had a gym in the MLC center. We had bike racks, um, people could could take an address and work from home. It was a lot more difficult. Now they can have their desk phone number, and they can take it home on their mobile so that they can be working from home. And it's totally transparent. Nobody knows that. Sorry. Totally opaque, so that nobody can see they're working from home because they've answered the advance of their business telephone number, or their receptionist answered their business telephone number. They have an address in town. They've got great co-working space they can work out in town. We should send you some pictures if we ever do this again. And, um,

4:38

and so we specialise in that, in that business. So of our, uh, 57,000 be exact clients, um, 50,000 of them work from home, um, at least three days a week.

4:56

So let's let's break this up then into what we're seeing, um, Australia, New Zealand, South east Asia showing some strength there, particularly with the market position. You've had some solid results out of, um, North Asia What's going on in Europe, the Middle East and also the US. You actually reported a loss. Why was that?

5:17

Well, we've never understood the US, and the US is probably never understood us. If we ever do get it to make profits, we've got about 100 million that we've written off in losses that you can carry forward. Uh, interestingly enough, even though we're an Australian company, less than 10% of our operation is in Australia and our substantial growth is is outside Australia and New Zealand. It's actually, um, in places like the Middle East and the Middle East is all encompassing. That includes, uh, the UAE where you're in Dubai and Abu Dhabi, Riyadh, which is a market bigger than the Aussie market and quite strong. And we're in, um, Jeddah, Riyadh, uh, Aqaba, which is Devon. And we just opened in the last weekend in a place called, um

6:14

uh, yeah. Why can't I think of it anyway? Medina in Medina. Yeah. So which is, uh, up. Uh, Jeddah is on the Red sea, and Medina is just a bit inland. Uh, and so our operation in, in Saudi alone is three times the size of Australia. So it's it's not a small operation. People actually in Australia don't understand circle. I don't think so. But if you look at our, um, operating profit. Well, I look at, as I said, I look at our, um, I look at the straight operating profit and record. It was about 55 or 56. It'll be in the low 60s next year. Well, if you take the cash off our market caps about 350. So the multiples are not that high. I'm not worried about the share price because, uh, I still own over 50 million of the 100 million that are out there. And, um,

7:13

I'm not a seller of the stock. And when you look at the listing in Saudi, while their multiple is at about 14% on net uh net profit pre tax. And we've got a valuation there we've talked about which comes in at uh over 400 million Aussie dollars. And we're going to sell about 30% of it. So we're going to we're going to hold 70%. So cervical Australia, which is cervical limited, will hold 70% of the operation in in. So Sally overall where are you seeing your main growth opportunity then.

7:54

Well I've got critical mass which is uh Japan uh the Middle East. We're starting to build more in uh, in the UK rather than Europe because it's less bureaucratic and uh. London is a great trading city. We, we haven't given up on, on the US. So we're looking they're the only place where we see real softness in the market is China

8:21

And why is that?

8:24

Well, I think the Chinese market overall, um, is in a lot more trouble than than than the Chinese think. I just, I just that's I mean, it's either that or we're not doing as well as we should in China from a management perspective. When you persisting in China though.

8:45

Well, yes, because you close the center. These centers now, um, cost between 4 and $6 million if you build them properly, remembering that the guys like Regis and we were spend less than a million Aussie dollars to build a center, we spend 3 or 4 times as much and we run ten people, um, to, uh, we run 12 people per 100 offices. They run between 2 and 3. So we're, uh, we're a different business model. Funnily enough, the small business guys and branch offices seem to be recognizing that because, um, our occupancy is going up, the number of, uh, Co-working and virtual clients. We've got increased by over 10% last year. Um, so on a, uh, from a profit perspective, we are way in front. But all of that comes back to the infrastructure, and they just seem to believe they don't have to spend on

9:45

infrastructure and building owners. Well, we've got place people like Mitsubishi who are about to open their 300 in in Japan. Um, Mitsubishi Moura, all of these guys building out dexus, um, are all building their own shared space, but it doesn't give anything. It's not anything like the product. They don't have geographic spread. They don't have the critical mass to market. They don't understand churn and churn in this business is about 70% per annum, uh, in civic corporates, about 50. But but in the industry, if you can call it an industry that generates above 70%. So that's a hell of a marketing challenge.