Stock Spotlight: Victory Offices (VOL.ASX) - A strong growth story? Another potential takeover target?
This week we spotlight another recent IPO which we participated in for the TAMIM All Cap IMA portfolios. Similar to Viva Leisure (VVA), which we spotlighted last month, this company checks many of the boxes for the kind of business we look for. Read on to find out more.
Victory Offices (VOL.ASX) is a premium serviced office operator. The company was founded in 2013 and has grown rapidly since to become the second largest operator in Australia by locations. VOL offers a premium service to its customers and is focused on the co-working or flexible workspace environment for business professionals and smaller sized companies.
VOL ticks many of the investment characteristics we look for when investing in a company, including:
In our mind VOL differentiates itself from the competition by focusing on customer service with a tailored, local, and personalised approach. The MD founded VOL following his own disappointing experience with some of VOL’s main competitors in the space. We believe their competitors’ very basic level of customer service and opaque approach to pricing is the key reason for VOL’s success to date. VOL provides complete transparency in their pricing model.
Last year VOL added well respected Chief Financial Officer Geoff Hollis, who we know and followed over the years, to their management team. Geoff previously served as the CFO of ASX listed Lifestyle Communities (LIC), a retirement village operator. During his eight year tenure between 2010 and 2018, the stock went from 50 cents to $6.00. We see Geoff as a conservative and safe pair of hands for the CFO role.
We are attracted by the way management carefully approaches and plans new locations which is showing with the group average occupancy rate sitting at 93%. An example of this is the new location in Barangaroo, Darling Harbour. At the time of launch, Barangaroo had pre-commitments of 25% occupancy and reached over 90% within 6 months. This was done through marketing to existing customers in nearby locations and other marketing channels.
VOL is growing fast and forecasting eight new locations in FY20, taking the total number of locations to 27 by the end of the year. So far the company is on track having opened a location in St Kilda Rd in Melbourne and executed four lease agreements for new locations in North Sydney, the Sydney CBD, Cremorne in Melbourne and Fortitude Valley in QLD.
VOL FY19 financials met prospectus forecasts and we are expecting strong growth in FY20. It is important to note that due to the new AASB16 accounting treatment of operating leases, VOL profit margins seem inflated as the lease costs are removed from the expense line in the P&L. We prefer to value the company on a normalized EPS basis before the new accounting changes.
VOL’s main comparable on the ASX is Servcorp (SRV.ASX). Servcorp is a much larger global company with a long but mixed track record. Although VOL now has more locations domestically than SRV, we feel SRV deserves a slightly higher multiple than VOL due to its geographical diversity and history. In saying that, VOL is growing much faster than SRV. SRV is trading on a 16x forward PE. Both companies are cashed up. We forecast VOL, on a normalised accounting basis, to earn 26 cents and 34 cents EPS in FY20 and FY21. This compares favourably to the current share price of $2.40 (single digit PE!)
Applying a discount to SRV and a conservative multiple we value VOL at $3.60 based on next year’s earnings. We expect the shares to re-rate as the company continues to announce new locations and establishes a medium-term track record of earnings growth and dividends.
We see VOL as a potential takeover candidate in future, as the industry begins the consolidation phase following the emergence of new entrants in the last few years.
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.