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The Business

Serviced Office Group plc provides fully comprehensive serviced offices and building management services. In addition to providing office space, the Group offers a number of other services to both internal and external companies including virtual offices, meeting rooms, office share, hot desking, and IT solutions.

Established in 2004 by Michael Kingshott CVO, the group has grown organically, via acquisition and via a key joint venture with UBS Investment Bank.  As at 31 July 2011, the group offers 23 sites within London, South East and the South – see the locations on the Serviced Office Group website here.

The Business Model

Each client pays a licence fee based on the number of work stations required, the location of the serviced office and any ancillary services which the client may require whilst based on the Serviced Office site.

The company owns a number of their own sites but most importantly they also offer a ‘management service’ for other third parties that are seeking short / medium term solutions for their surplus property sites which may have long lease liabilities as well as increasingly high void costs given changes in rating laws.

These management services contracts can be arranged in one of the following three ways:

1) A vanilla ‘management’ contract – whereby clients receive all revenues less costs and Serviced Office Group would receive a minimum fee and performance element (E.g. 15% EBITDA).

2) A ‘base rent plus option’ – whereby clients receive a base rent plus a percentage of the profits net of costs.  Service Office Group receives the remaining percentage of profits less costs.

3) ‘A joint venture’ –whereby profits are split 50:50 between client and Serviced Office Group and working capital is funded by both parties.

By giving Serviced Office Group the opportunity of offering serviced office space at these buildings, a convenient solution is created for both parties (Remembering that by not entering into such an agreement, a company would still be required to pay costs on the surplus building such as insurance, business council tax, security, maintenance etc). 

Serviced Office Group has entered into a management services arrangement with BT Telereal, which controls a considerable property estate.

Michael Kingshott and Liz Scannell                           

Entrepreneurial drive - Michael Kingshott PLC

Michael Kingshott is perhaps one of the most successful and colourful entrepreneurs in the UK yet, whilst the likes of Sir Richard Branson and Lord Sugar take the limelight, Michael carries on building and ultimately selling consistently successful enterprises.  His is not necessarily a ‘household name’ yet his achievements are considerable. 

Beginning in 1964, Michael’s entrepreneurial career spans the industries of Property, Ports, Shipping, Automotive service and Insurance and by his estimates he has employed over 1,500 people to date.  He is perhaps most famous for co-founding Sally Line (the ferry operator) in 1981, and developing the Port of Ramsgate.  Sally achieved a near 20% market share of the cross channel passenger and freight market and gained a considerable reputation for on-board duty free sales. Indeed, Michael created one of the largest floating retail outlets on ships to the point where Sally Line occupied the 13th largest duty free sales venue by revenue in the world.

“It was actually my idea to introduce a £1 day return. We made our money on the Duty Free by offering the provision of a wider range of retail opportunities than had been the norm on rival cross channel ferries, our ships became floating luxury shops”.

Michael was also Group Managing Director of Jacobs Holdings PLC from 1994 to 2002 (Now Bidcorp PLC) having Property, Transport (Automotive Distribution, Traffic Management ), Shipping (Ship Owning Ferry & Port Operator) interests and in particular developing Dartford as a successful port.  From a turnover of £8m, he increased turnover to £150m and generated profits of £5 million.

“I was particularly proud of the Dartford deal.  The Port of Dartford development cost us £7.5 million and we eventually sold it for £53million”.

So, here is an entrepreneur who is tried and tested and enjoys building businesses from, in many cases, scratch as well as developing a contact list of the great and good of UK business, as can be seen in the strategic equity investors attracted to Serviced Office Group and discussed later in the article.

“Every Penny Counts”

Despite Michael having Southern roots, he displays all the characteristics of a Yorkshireman crossed with a Scotsman.

“I make no apologies for my beliefs which have served me well in all the businesses that I have run.  Every building that I take over, I believe in utilising every inch not just in terms of space re potential rental income but also everything that comes with the building; there is no waste in my buildings, even if I were to take everything out from the carpet on the floor, office partitioning, suspended ceilings etc, everything is re-used and if I can’t re-use it on the site or on any of my other sites, I will sell to ‘reclaimers’.  This is what Serviced Office group is about. I can’t stand waste and all my staff know that this is one of my guiding business principles.  Similarly, if there is expenditure over £500, which, by the way, must pass across my desk, I want to know full chapter and verse and people had better have a good reason why we need to spend over this amount, otherwise they are for the bloody high jump!”

Michael is not a man to mince his words

“I do not tolerate fools or time wasters but I hope that my people wish to come on a journey with me knowing that they will be worked hard but that there will be fair rewards for their efforts at the end of the day”.

“Solutions not Problems”

When I was taken on a whistle-stop tour of the flagship Covent Garden serviced office on Long Acre, Michael was very keen to point out creative yet economic solutions to ‘expensive problems’, from the gold leaf paint borders of alcoves to the re-designing of toilet facilities such that three serviced apartments, rather than one, could be created.

“My staff know not to tell me that it is impossible.  I always look very hard at problems and usually find solutions.  There is always a solution if you are creative enough.  It makes my blood boil when people don’t or won’t think outside the box”.

Continuing on this theme, it is most unusual to find a Chairman that knows almost to the penny what things cost. Indeed, if there was a special subject on property costs on Mastermind, Michael would surely score maximum points.

Michael’s mind is almost encyclopaedic when it comes to the cost of anything from the office furniture supplied to his customers, to plants, unit costs of electricity, carpets, re-conditioning of a lift etc. 

Returning to the gold leaf alcove effect on the Penthouse floor of Serviced Office’s Covent Garden site, Michael asked me: “How much do you think that cost?”  I was slightly taken aback - “I’m not sure, £400?” Michael continued “If I was to bring a tradesman in, perhaps £1,000, we did it for £146”.  Everywhere there are countless examples of Serviced Office challenging standard thought.

most famous for

co-founding Sally Line

"I believe in utilising

every inch...."

"always a solution if you

are creative enough"

Financials and Forecasts

Historically, the Group has generated PBT of £1.76 million in 2009 and £1.33 million in 2010, reporting EPS of 1.97p and 1.19p respectively and therefore generating a very low historic P/E ratio of 2.94 at a bid price of 3.5p.

In addition, the NAV as at 31 December 2010 was 4.07p, a little above the current mid market price of 3.5p.

Revenue increased from £7.087 million to £9.855 million in 2010. This was split between the serviced office business - £9.554 million and the Managed service office business - £0.301. There was net cash of £0.92 million on the balance sheet as at 31 December 2010, having generated positive operating cash flow of £1.61 million during the last financial year.

The group has investment property assets of £30.460 million, with secured borrowings of £26.351 million against these assets.

Unfortunately, there are currently no forecasts in the market as Serviced Office Group is in the process of appointing a new NOMAD / broker.  Michael candidly explains

“This has been, to a certain extent, deliberate as we didn’t feel ready to ‘sell the message’ until things had settled down with the business.   Remember, we have been building an executive structure, including bringing in Liz (Scannell) on the finance side and Andrew (Butler) on the Sales and Operations side.  Now that I have delegated these roles, I still need to hire a Property Development Director, which I will do very soon.  So, we are now at a point where we feel comfortable and confident discussing our opportunity with prospective investors.  We should be in a position very shortly to announce our new broker and a subsequent research note will be written with forecasted numbers for 2012 and 2013”.

Serviced Office industry metrics

The average rate per work station as at 31 December 2010 was £321. Within this number, Serviced Office Group also include ‘additional services’ which include IT solutions, meeting rooms etc.  These services make up approximately 28.9% of the licence fees paid in 2010 and are important revenue generators for the company.

The average occupancy over the year within the Serviced Office estate was 76.1% in 2010, compared to 75.7% in 2009.  Within the serviced office industry, occupancy will very rarely be 100% due to continuous churn in the customer base.  Serviced Office Group states in their annual reports that their optimum occupancy is 80% and above.

Strategic shareholders

One of the great strengths of Serviced Office Group is the quality of its strategic equity shareholders.  Some are very well known, such as Sir Tom Farmer (Founder of Kwik Fit) who holds 14.1%, others less well known but still extremely heavy weight in investment terms such as Andrew Bourne ,who has 16.8% and who has links to the Bourne family (Bourne Leisure, owner of Butlins, Warner Leisure hotels etc), John Morley (son of Eric Morley) who has 7.1% and Daniel Taylor, a successful  US investor who invests on behalf of a number of famous American high net worth families, with 4% directly in his own name. Daniel Taylor represents Westchester Properties, the investment vehicle of a very famous high net wealth family, with 18%.

Liz makes further comment:

“We are now at a stage where we would like to broaden our shareholder base and would certainly welcome institutional investors onto our shareholder register”.

Michael himself has 16.8% of the equity.

Aimzine Comment

An old investment adage states that the success of a potential equity investment usually begins and ends with high quality, proven management.  Serviced Office Group has a tried and tested formula in Michael Kingshott.  However, in fairness to the recently appointed senior executive management team, the business is rapidly evolving from entrepreneurial driver to professional managers.  Michael has delegated a considerable amount of his executive responsibilities to Liz Scannell and Andrew Butler.

"didn't feel ready to

sell the message"

optimum occupancy

is 80% and above

Many prospective investors may not know that Serviced Office Group is the UK’s third largest serviced office provider as measured by the workstation metric (5,327 – June 2011) after Regus and MWB yet is almost unheard of outside of its sector.  The company has made a shrewd call in focusing its flexible serviced office offering in London, the South East and South, where economic activity is much more dynamic and continues to grow, even in these challenging economic times.

It would be an extremely foolhardy investor who would bet against the Serviced Office Group successfully executing their growth strategies in the coming years.

Simon Murphy has a direct and indirect holding in Serviced Office Group PLC.

UK's third largest serviced

office provider

Written by Simon Murphy

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