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:

• Consistent Growth in Topline: 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. This indicates that an increasing demand for the company’s services, which is encouraging. Notably, the company reported a ~17% CAGR growth in its revenue 2016 to 2021, despite the pandemic in 2020 and 2021, respectively. We expect the momentum to continue driven by the growing demand for the restoration and home improvement services.

               Source: Company Presentation

• Strong Growth from FirstService Brands: In FY21, the company reported a 23% y-o-y growth from its FirstService Brands segment to USD 1.66 billion. This was driven by 13% organic growth due to strong traction from restoration and home improvement operations along with the positive impact from the recent acquisitions. The Management is bullish on this segment and high-single digit percentage organic revenue growth in 2022 aided by growth of its company-owned operations.

• Higher dividend distribution: Despite the ongoing sluggish economic growth, the company has increased its dividend distribution of USD 31.2 million in FY21, higher than USD 27.4 million in FY20. This is impressive as most of the companies are lowering their dividend payment in order to retain liquidity.

• Result Announcement: The company would disclose its Q1FY22 result on April 27, 2022.

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.

FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• FSV announced its full-year result, wherein the company posted its revenue of USD 3.2 billion, significantly higher than USD 2.7 billion in FY20. The growth was driven by impressive growth from both the operating segments.
• Operating earnings surged to USD 201.6 million from USD 169.4 million in FY20, driven by higher revenues, partially offset by increase in cost of revenues and selling, general & administrative expenses.
• The company reported its net earnings of USD 156.1 million in FY21, considerably higher than USD 109.5 million in FY20, aided by higher operating earnings coupled with lower net interest expense.
  

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

Analysis By Kaline Group

Stock Recommendation:

The company expects a mid-single digit percentage organic growth within the FirstService Residential segment due to new business wins, coupled with increase in labour-related services across the North America. The company is targeting an annual revenue growth of more than 10% in FY22, while expects higher operating earnings in FY22. Moreover, the company reported an improved cost structure, which resulted to an operating and net margin of 6.6% and 4.8%, respectively, in FY21, improved from 6.1% and 4%, respectively, in FY20. 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 peers like dentalcorp Holdings Ltd, Park Lawn Corp etc. Considering the aforesaid facts, we recommend a ‘Watch’ rating on the stock of FSV at the last closing price of CAD 181.58 on April 04, 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 April 04, 2022). Analysis by Kalkine Group

Technical Analysis Summary

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