A-Living Services Co Ltd (SEHK: 3319) is a property management services company. The company provides services such as cleaning, security, repairs, and maintenance, as well as greening and gardening.
A-Living Services has also been a hot stock, with its shares more than tripling from the beginning of 2019 to early September of 2020.
Despite the coronavirus outbreak this year, shares have rallied almost 43% year-to-date (at the time of writing).
What explains A-Living Services’ outperformance? Here’s more on the company, why investors have bought into the stock, and whether there is upside ahead.
One reason for A-Living Services’ outperformance is fast earnings growth. Investors love stocks that grow their earnings quickly and A-Living Services has excelled in that category.
For 2019, A-Living Services grew profit attributable to shareholders of the company by 53.7% year-on-year and earnings per share by 48.4% year-on-year.
For interim 2020, the company grew core profit attributable to shareholders of the company by 41.1% year-on-year and earnings per share by 40% year-on-year.
M&A and execution
Given that property management is a mature sector, A-Living Services has achieved a considerable percentage of its growth by buying other companies.
By buying other companies, A-Living Services gains scale that could potentially improve its profitability.
It has also increased its sales in the past due to price hikes. Given its focus on quality and service, A-Living Services has a strong brand and a reputation for good service.
According to China Index Academy, A-Living Services had an overall satisfaction rate of 90.5% in 2019 when excluding M&A, versus the industry’s 73.1% and benchmark of 85.5%.
Given the higher satisfaction rate, A-Living Services arguably has more pricing power.
If it buys other companies, makes the right adjustments, and shares its brand, it could have an opportunity to increase its sales in many cases by simply increasing its price to match the corresponding increase in satisfaction rate.
In terms of M&A, A-Living Services helped consolidate the industry further in 2019 by acquiring a 60% interest in New CMIG PM and CMIG PM, which according to A-Living Services in 2019 was the “largest M&A deal in the industry to date”.
According to the company, its “business scale and profitability will be significantly improved, and revenue structure will be further optimised to consolidate A-Living’s leading position in the industry”.
In interim 2020, A-Living Services continued to execute in terms of its M&A. In terms of acquired companies in the first half of 2020, A-Living Services average price hike was 7.2% and its renewal rate was 95%.
Is there more upside?
Given its stock rally, A-Living Services currently trades for a forward price-to-earnings (PE) ratio of 26x.
Although that’s higher than the forward PE ratio of a lot of stocks, A-Living Services is also growing a lot faster than a lot of them.
If A-Living Services management can keep up the fast earnings growth rate, the stock has more upside.
Given the size of the property management market, there’s still room for more growth if A-Living Services management can continue to smartly buy companies. It will take good continued execution, however.
A-Living Services shares have surged since the end of 2018 thanks to fast earnings growth driven by M&A and good management execution.
If management can keep doing great M&A, there’s definitely more upside left.