Tuesday, April 9, 2019

A Current AIM International Equity Holding: FirstService Corp. (FSV, $87.70): “All Grown Up Now” By: Brandon Shanklin, AIM Student at Marquette University

FirstService Corp. (FSV, $87.70): “All Grown Up Now”
By: Brandon Shanklin, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


FirstService Corp. (NYSE:FSV) engages in two segments: Residential and Branding.  Their residential segment offers property management services in North America. The FirstService Brands segment covers residential and commercial customers through both franchise systems, and company-owned operations.

• AX has completed 5 acquisitions in the past 5 months further diversifying their cash flows and risks.
o   Acquired Lieberman Management Services on February 11th, 2019.
o   Acquired Commercial Fire & Communications, Inc. and Allied Fire Protection, Inc. on January 10th, 2019.
o   Acquired Community Management Group LLC on November 12th, 2018.
o   Acquired Condominium Concepts Management Inc. on November 10th, 2018.

• Revenues for the quarter were up 13% in total with a robust 8% generated organically, largely driven by double digit organic growth in their brands segment.  Inorganic growth contributed 5% growth in revenue mainly driven by their two acquisitions of Community Management Group and Condominium Concepts Management Inc. These further acquisitions should help spread out risk and diversify their cash flows.

• The FirstService Corporation Brands segment generated revenues up 25% versus the prior year, which was made up of 14% organic growth and 11% acquisitions completed in the past year, in restoration, in fire service, and relating to our company-owned acquisition strategy at California Closets. The organic growth of 14% was driven by Paul Davis Restoration and their work in activities from hurricanes Michael and Florence, plus the wildfires in California, but there was an increase in working capital requirements to Paul Davis operation, so FirstService cash flow from operations experienced a year over year decline.

Key points: 

FirstService Corporation has elected to settle long-term incentive arrangement and eliminate dual class voting structure.  This incentive arrangement was implemented in 2004 in the form of stock options and other compensation entitlements.  The motivation behind this arrangement was to motivate entrepreneurial founders/CEOs to create long-term value for shareholders.  From that, FirstService grew by more than US$3 billion since 2004, representing an annualized return of over 24%. Given the growth of FirstService and strong management team in place, Jay Hennick announced that he was willing to receive a proposal from FirstService to terminate the MSA and unwind the dual class share structure, thereby relinquishing his effective control of the Company. The transaction according to FirstService will create alignment among all FirstService shareholders, each of whom will own the same class of voting shares. In addition, the Transaction will facilitate an orderly transition by providing shareholders and the Board of Directors with greater flexibility to determine the future direction of the Company.  As a result, FirstService Corporation will also issue a total of 2.92M subordinate voting shares.

FirstService Corporation recent acquisitions of Condo Concepts and Community Management hold market leading positions in Atlanta and Charleston and with that they significantly increase their presence in both markets.  Also, what’s most exciting is Condo Concepts provides FirstService Corporation with a larger footprint in the fast-growing Nashville market, which they believe they can quickly capitalize on post integration after introducing their systems and differentiators.

FirstService Corporation announced on March 20th, 2019 that it has implemented an e-Commerce platform with California Closets Essentials, a curated collection of best-in-class closet accessories designed to create a more comprehensive brand experience for customers.  Featuring an initial rollout of 8 product categories and over 150 items, the private-label offering is assembled for superior performance and style, has allowed California Closets Essentials, a subsidiary of FirstService Corporation, to now become a full-service organizational resource.

11% increase in dividend to $0.60 per share up from the prior $0.54 in Q4, which is the fourth consecutive annual dividend hike of 10% plus since separating from Colliers International in 2015.

What has the stock done lately?

With the effects of their implementation of their acquisitions starting to be realized, FirstService Corporation stock is up 28.32% in the past three months.  In the past month it reached its high at $90.20 and currently is at $85.22.  With the most recent acquisitions, FirstService corporation must take advantage of its inorganic additions and follow similar guidelines as it has in the past to implement these acquisitions effectively.

Past Year Performance:

FirstService Corporation is lurking around it’s 52-week of $90.22 and is currently at $85.22, with the low being $64.87 in its 52 week range.  In the past three months there has been a stock growth of 28.32% which is strong, but it should not overshadow its 20.88% stock growth overall in the past year.

Source: FactSet
My Takeaway:

FirstService Corporation has put up some major productive numbers the past five years since their spin-off from Colliers International, especially under the guidance of Jay Hennick.  Now with FirstService Corporation being “all grown up now” being groomed by Jay Hennick, he has decided to give up effective control of the company.  Jay Hennick is still the active Chairman so the company is still under good hands, but with the lose of effective control hopefully objectives and growth get stunted by it.  Management has a proven track record and has proven production and efficiency, especially with implementations of acquisitions.  With the recent acquisitions, I believe it will further diversify FirstService Corporation’s cash flow and risks, setting them up for further growth and efficiency. 

Source: FactSet