Colliers International: This Spinoff Could Run Out Of Steam

Summary

• Company spun out of FirstService Corporation in 2015.
• Multiple acquisitions driving growth.
• Asset light and very profitable business.
• Full valuation and high growth expectations leave room for disappointment.

[Please note that all amounts are in U.S. dollars.]

Colliers International Group $70.30 (Nasdaq symbol CIGI; Manufacturing & Industry sector; Shares outstanding: 37.8 million; Market cap: $2.7 billion; www.colliers.com) is a global real estate services company headquartered in Toronto, Canada. The company commenced trading on the Nasdaq and Toronto stock exchanges in its current form in June 2015 but its origins date back to 1898 when Macaulay Nicolls was founded in Vancouver, Canada.

In 2004, FirstService, a company started by Jay Hennick, the current Chairman of Colliers, acquired the largest operations of Colliers. Through various acquisitions, the company developed into a global real estate business, with 12,000 employees located in 282 offices in 35 countries.

A profitable spinoff

In June 2015, FirstService (“FSV”) spun out the Colliers operations with shareholders receiving one Colliers International share for every FSV share held. Colliers continued providing commercial real estate services while FirstService’s focus remained residential property management. This proved to be a highly accretive exercise for shareholders as the share prices of both companies performed exceptionally well since the separation.

Hennick now serves as chairman of the Colliers board. He is also the CEO of the business and recently owned 4.3% of the subordinate voting shares and 100% of the multiple voting shares. Through the dual share class structure, he effectively controls the business with 43.8% of the total shareholder votes. We note that Mr. Hennick sold 851,000 shares between June 2017 and March 2018 which represents 38% of his holding of the subordinate voting shares while retaining 100% of the multiple voting shares. Staff members in total hold about 25% of the equity of the company.

An asset light business model

The company operates globally with the largest revenue contributions in 2017 from the U.S. (43%), Europe, Middle East and Africa (23%), Asia Pacific (19%) and Canada (13%). In 2017, the company generated revenues of $2.3 billion and a net profit of $63 million.

Colliers reports the results of their operations in 2 categories, Sales and lease brokerage, & outsourcing and advisory:

Sales and Lease Brokerage: Colliers has 3,900 agents around the world who completed 52,000 sale and lease transactions with a total value of $102 billion in 2017. These agents work on a commission basis that is linked to the value of the transactions. This division also incorporates a capital markets capability that provides advice on debt and equity financing to clients.

The combined revenues of the sales and leasing business in 2017 was $1.48 billion or 65% of the total company revenues.

The Outsourcing and Advisory Services division provides a range of real estate services to corporate clients including appraisal and valuation, property management, lease administration, tax appeals, asset management and research. The division employs 3,600 staff globally.

Revenues are derived from fees which are typically contractual, both fixed and performance based, and contract terms are often multi-year providing recurring or repeat revenues. This division contributed 35% of total revenues in 2017.

Acquisition-fuelled growth

The business has grown rapidly since Mr. Hennick acquired Colliers in 2004. Since then, the company has spent $1 billion on 70 acquisitions. Revenues grew by 19% per year over this period - organic revenue growth is estimated at 5-6% per year while acquisitions contributed another 13% to growth. The playbook to acquire and integrate seems to well established.

Despite the heavy acquisition schedule, the company has managed to grow its (adjusted) EBITDA margins over the past 5 years from 6.9% to 10.6% in 2017. This is due to operating leverage which comes with larger scale. However, we note that margins have stabilized over the past 3 years at around 10.5% and are now in line with its larger global peers. It indicates that further improvements may be difficult to achieve.

The company has a stated objective to double the size of the business between 2015 and 2020. As part of this objective it plans to grow organic revenue by 5% per year and make additional acquisitions in order to grow revenues, EBITDA and earnings per share by 15% per year.

The global market for the company’s services is estimated at over $200 billion of which the top 5 firms have captured a 20% share. This implies that the Colliers market share is just over 1% which leaves plenty of room for further consolidation.

Colliers is still considerably smaller than two of its main peers, Jones Lang Lasalle and CBRE. However, its revenue growth since the separation and its profitability as measured by the EBITDA margin and return on capital is in line with the peers (see table).

Balance sheet in good order and positive cash flow

The company had shareholder’s equity of $285 million by the end of 2017, total debt of $250 million and cash of $109 million. Net debt to adjusted EBITDA totalled 0.64 and the debt to capital ratio was 0.33.

Cash flow from operations amounted to $213 million in 2017 while capital expenditures was $40 million leaving a sound free cash flow balance of $173 million, 32% higher than 2016. We note that free cash is consistently positive, which reflects the asset light and profitable business operations.

Capital expenditures for 2018, mostly on office space and IT systems, is expected to amount to $40 million to $42 million in 2018 which should result in another year of positive free cash flow generation.

The company spent $104 million in 2017 on acquisitions and $98 million in 2016. These were financed with internally generated cash flows and a revolving credit facility.

Risks on the horizon

The real estate business is cyclical, and the company faces the risk that sales transactions and values may decline materially during an economic recession. This was evident during the 2008 financial year when revenues dropped by 16% during the financial crisis. However, the company notes that 66% of the revenues are now from services that are contractual or recurring.

Although the company has successfully concluded numerous acquisitions over the past decade, we are concerned about the high dependency on acquisitions to reach growth targets. If acquisitions become overly expensive, management may walk away or overpay – which in both cases will detract from the overall growth objective.

A strong performance in 2017

In its 2017 financial year, revenues increased by 20% to $2.3 billion partly as a result of organic growth (7%) and partly as a result of acquisitions (13%). Adjusted EBITDA increased by 15% to $220 million while adjusted earnings per share increased by 19% to $2.60 per share.

Cash flow from operations was strong at $213 million, 36% higher than the previous year while free cash flow increased 32% to $173 million.

The company pays a small regular dividend which amounted to $0.10 per share in 2017, 10% higher than 2016.

Full valuation

Colliers has a long track record with fairly stable and consistently growing revenue, profits and cash flows. We therefore consider profit and cash flow multiples as appropriate tools for valuations.

Given the stock’s current price and consensus estimates for the next 12 months, the company is valued on a price to earnings ratio of 19.8 times, an EV/EBITDA ratio 10.2 times and a price to cash flow ratio of 13.7 times.

This represents a premium to the average multiples of its main peers.

Bottom line …excellent company but unattractive given the valuation and risks

We like the path followed by management to grow and expand the business as well as the asset light and profitable nature of the business. However, in our view, much of the upside is already reflected in the share price which has gained 71% since the spin-off in June 2015. Risks such as a shortfall on the growth targets caused by a lack of suitable acquisitions or a deterioration in the real estate market can easily depress the valuation.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: By Deon Vernooy, CFA, for TSI Wealth Network