FirstService Corporation

FirstService Corporation (TSX: FSV) operates in the essential outsourced property services sector. The company is serving its customers through two industry-leading service platforms, namely FirstService Residential and FirstService Brands. The Company caters to the North American market and manages thousands of residential communities, including high, medium and low-rise condominiums and co-operatives.

Key Highlights:

• Consistent Growth: The company has an impressive track-record of revenue growth. During FY14 to FY19, the business reported a CAGR of 16% in revenue. The company has expanded its footprints to several on-site staff services and other transaction services, apart from its traditional services like property management and consulting etc. The company reported CAGR 23% in Adjusted EBITDA during FY14 to FY19, aided by operational improvements.               

Historical Trends (Source: Company Presentation)

• Reduction of debt: The company has successfully reduced a significant portion of its long-term debt, which stood at USD 548.130 million at the end of Q3FY20, as compared to USD 761.078 million in FY19. The reduction of debt component would decrease the interest expense, which would subsequently reflect in the company’s profitability. Notably, the company reported a lower interest expense at USD 5.464 million, against USD 12.719 million in Q3FY19.

Q3FY20 Financial Highlights:

• FSV impresses with its third quarter performance and posted revenue of USD 741.932 million, higher than USD 672.253 million in the previous corresponding period (pcp). The improvement was driven by higher revenue from First Service Brands segment, while a minor decline from First Service Residential segment remained as a drag.
• Operating earnings grew to USD 59.130 million, higher than USD 49.698 in Q3FY19, supported by higher revenue. While an increase in the selling, general and administrative expense remained a drag.
• The quarter was marked by higher net earnings of USD 40.996 million, as compared to USD 26.336 million in pcp.
• Cash and cash equivalent stood at USD 158.570 million, while total assets stood at USD 2,122.225 million.                                       

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Higher costs such as cost of sales, higher SG&A expenses might take a toll on the company’s profitability and would hinder the margins.

Stock Recommendation: The Business reported a solid quarterly performance, backed up by improved revenue growth, a significant decline in interest costs, higher profitability and a reduction in the long-term debt. However, the company’s FirstService Residential revenues remained slightly below compared to the previous corresponding period, as the performance was tempered by continued COVID-related closures of client facilities, which subsequently impacted the operations. We believe, the company’s long-term growth prospective remains intact, while the business would be focusing on its high-margin products in the coming days, which is a key positive. We believe that most of the positives are priced in at current trading level. The stock of FSV gained ~50% in the last one year and is trading towards the upper band of its 52-weeks trading range of CAD 184.43 and CAD 83.36. On the valuation front, the stock is available at EV/EBITDA multiple of 21.6x on NTM basis, as compared to the industry (Real Estate Operations) median of 12.5x. Hence, considering the current price levels and valuations, we have given a ‘Watch’ stance on the stock at the closing market price of CAD 181.86 on October 29, 2020.

FSV Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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