FirstService Corporation (TSX: FSV) operates in the essential outsourced property services sector, which operates through two industry-leading service platforms, namely FirstService Residential and FirstService Brands. The group caters across the North American market and manages several residential communities, including high, medium, and low-rise condominiums and co-operatives.

Key Updates:

• Strong operating model: Over the years, the company reported a constant growth in its business which resulted to a stable top-line growth and is a key positive. Notably, the company reported a CAGR ~17% in revenue during 2016 to 2021, despite the pandemic in 2020 and 2021, respectively. Moreover, in Q1FY22, FSV posted its revenue of USD 835 million, versus USD 711 million in pcp, depicting a 17% y-o-y growth. We expect the momentum to continue for the rest of FY22 driven by the growing demand for the restoration and home improvement services. Notably, the company also showed disciplined cost management, which resulted to CAGR ~20% in Adjusted EBITDA, which is impressive.

Source: Company Presentation

• Increase in Dividend payment: The company reported a higher dividend payment of USD 8.03 million in Q1FY22, as compared to USD 7.1 million in pcp. A higher dividend distribution amidst the ongoing sluggish economic growth is impressive as most of the businesses are lowering their dividend distribution to retain liquidity. The company reported a quarterly cash dividend of USD 0.2025 per share with a payment date of July 07, 2022. Notably, during FY16 to FY22, the company reported 22% CAGR in dividend distribution.

   Source: Company Report

• Growth from the FirstService Residential segment: In Q1FY22, the company reported a 12% y-o-y growth from its FirstService Residential revenues of USD 394.1 million. core management and sited labour contract growth, particularly in our Florida, California, New York and Mid-Atlantic markets. Notably, this segment derived ~47% of the company’s total income. We expect the above momentum to continue in the rest of FY22 driven by growing demand for the company’s services.

Risks associated with the Investment:

The company’s operations might be hindered due to slower economic activities and a decline in the housing construction across the North America region. A surge in inflation might result in an increase in input costs which might weigh high on the profitability margins of the company. 

  Q1FY22 Financial Highlights:

Q1FY22 Income Statement Highlights (Source: Company Report)

• FSV announced its Q1FY22 result, wherein the company posted its revenue of USD 834.5 million, significantly higher than USD 711.0 million in Q1 FY21. The growth was driven by impressive growth from both the operating segments.
• Operating earnings slide to USD 29.0 million from USD 33.8 million in Q1FY21, primarily due to an increase in cost of revenues coupled with higher selling, general & administrative expenses.
• The company reported its net earnings of USD 18.8 million in Q1 FY22, declined from USD 23.8 million in pcp, due to lower operating earnings as mentioned above, partially offset by lower income tax expense.

Valuation Methodology (Illustrative): EV to Sales based methodology.

Analysis By Kaline Group

Stock Recommendation:

The company has a highly predictable and recurring revenue streams, which provides top-line consistency and operations stability. Moreover, despite an increase in input costs, the company has retained its profitability and posted its Adjusted EBITDA of USD 62.3 million in Q1FY22, 4% higher than pcp. This is commendable and indicates strong cost management. We have valued the stock using EV to Sales-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Real Estate Operations) median on an NTM basis. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of FSV at the last closing price of CAD 161.97 on May 31, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 31, 2022). Analysis by Kalkine Group

Note: The reference data in this report has been partly sourced from REFINITIV

  Technical Analysis Summary

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