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Investment Thesis
FirstService (NASDAQ:FSV) is an essential outsourced property service provider in North America. It has acquired Roofing Corp of America which I believe can act as primary catalyst to growth of the company by expanding its geographic footprint and customer base.
About FSV
FSV deals in the essential outsourced property services sector mainly in the North American market. It serves its customers in two operating segments: FirstService Residential and FirstService Brands. The FirstService Residential segment mainly provides various property management services across a wide geographic region to various clients comprising homeowner associations, co-operatives, active adult and lifestyle communities, master-planned communities, and other residential developments governed by multi-unit residential community associations and or common interest. It operates approximately 8,700 communities, constituting over 4 million residents. It offers several ancillary services: a full-service swimming pool, on-site staffing for building engineering and maintenance, security, and a front desk. These services are mainly offered under contract with a fixed monthly fee. FirstService Residential contributed approximately 47.31% to the company’s total revenues in 2022. The First Service Brands segment operates and offers essential property services to commercial and residential customers. It deals in commercial and residential restoration, custom-designed and installed closets, floor covering design and installation services, painting, home inspection services, home storage solutions, and fire protection and related services. This division represented approximately 52.69% of the firm’s earnings. The company has five franchise networks: Paul Davis Restoration, CertaPro Painters, Pillars to Post Home Inspectors, California Closets, and Floor Coverings International.
Revenue Trend of FSV (Investor Presentation: Slide No: 5)
Acquisition of Roofing Corp of America
The property management services market experienced downturn during the Covid-19 pandemic and later due to inflationary pressures. However, the company has maintained its upside and managed consistent revenue growth. The industrial scenarios are changing slowly as economic conditions are stabilizing steadily. The housing sector is estimated to expand in the next year. As per National Association of Realtors, existing home sales can be boosted by 13.5% YoY from 4.10 million to 4.71 million. I think this builds a great opportunity for the company which can induce significant demand for its services. In addition, the trends in the development of homeowner associations are highly positive and indicate an upside which is also one of the growth factors for the company. Identifying these scenarios, FSV has recently announced the acquisition of Roofing Corp of America, for a transaction price of $413 million which is commercial roofing firm in North America. This addition can highly benefit the company in increasing its capabilities in maintenance, property repair, and restoration. Roofing Corp offers end-to-end roofing services, comprising new roof installations, re-roofing, and repairs & maintenance to building owners, HOAs, and property & facility managers. It generates $400 million in annual revenues. I believe this deal can act as catalyst to accelerate the company’s growth as the acquired firm has a significant scale, broad product offerings, and geographic footprint which can help the company capture additional market share and increase its profitability by adding more customers to its portfolio. In addition, Roofing Corp is a competitive player in the North American market which can help FSV to create its strong presence and increase its market penetration which can further boost its revenues.
Dividend Yield
The company has consistent distributions which indicates its strong positioning. It paid a $0.225 dividend in each of the four quarters of the current year, which makes the annual payout $0.9 and represents a yield of 0.56%. This dividend yield makes the company a good stock, especially for risk-averse and retired investors who are seeking fixed regular income along with capital appreciation. I believe that its expansion activities can further boost its cash flows and we can expect increased returns in the next year.
What is the Main Risk Faced by FSV?
The demand for the company’s services is highly related to market conditions such as resale rates, property values, and liquidity for real estate transactions. A market that has high resale rates presents a good opportunity for the company as demand for its services such as painting, closet installation, storage solutions, and home inspection increases. However, if real estate industry slows down due to economic downturns, it can reduce transactions and result in low spending by homeowners on such additional services which might further deteriorate demand for FSV’s solutions and lead to contraction of its profit margins.
Valuation
The industry was facing several headwinds due to macroeconomic pressures however, it is steadily showing signs of recovery. To cater to this growing demand, FSV has recently acquired Roofing Corp of America which can boost its profitability by strengthening its service capabilities and increasing its customer base. After considering all these factors, I am estimating an EPS of $5.79 for FY2024 which gives the forward P/E ratio of 28.07x. After comparing forward P/E ratio of 28.07x with the sector median of 35.47x, we can conclude that the company is undervalued. I think the firm can potentially grow in the next year as a result of positive demand in the industry and its recent acquisition which can help it to trade above its current P/E ratio. I estimate that the company might trade at a P/E ratio of 34.49x in 2024, giving the target price of $199.69, which is a 22.86% upside compared to the current share price of $162.53. A weaker real estate market can affect the financial performance of the company during adverse economic conditions. I think in that case, it can contract the profit margins and EPS of the company.
|
Scenario |
EPS Estimates |
P/E Ratio Estimates |
Target Price |
|
Best case |
$5.79 |
34.49x |
$199.69 |
|
Bear case |
$5.67 |
34.36x |
$194.82 |
I believe in the bear case scenario of reduced sales due to adverse industry conditions, the EPS of FY2024 might be $5.67, and estimate that the company might trade at a P/E ratio of 34.36x, which gives a target price of $194.82, representing an upside of 19.86%.
Conclusion
The company is experiencing positive growth which is reflected in its revenue upside. I believe it can sustain this growth for a longer period due to the rebound of industry demand combined with the company’s recent acquisition which can potentially increase its profitability by expanding its customer base. However, it is exposed to the risk of cyclicity which can contract its profit margins. It also pays consistent dividend. The stock is currently undervalued and investors can expect healthy 20%-23% growth from current price levels as result of its significant portfolio expansion. Taking into account all the above factors, I assign a buy rating to FSV.
