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Questor: it may not be as highly valued as WeWork but IWG is still best avoided
Questor share tip: the former Regus has suffered declining profits as it invests more in new sites, while debt has surged
One of the great mysteries of business today is how WeWork came to be valued at close to $42bn (£32bn).
The office space provider is certainly on-trend, given that self-employment and start-up life are revered as the new rock and roll.
Thanks to its messianic, shaggy-haired boss, Adam Neumann, there is also an aura of excitement about how far a firm already present in 100 cities can go. And it has backers to die for, notably the deep-pocketed Saudi-Japanese technology investor SoftBank.
But WeWork also lost $1.9bn last year on sales of about $1.8bn and doubters wonder how it will fare if the economy turns down in some of its major markets including London, where it has become the largest office occupier lightning-quick.
It is a conundrum that Mark Dixon must have considered too. The former hot- dog seller had a 20-year start on WeWork and yet his IWG empire, still best known for temporary office brand Regus, is worth a fraction of the New York upstart, despite making actual profits and counting heavyweight clients including Deloitte and HSBC.
Co-working and corporate downsizing mean serviced offices are on the up, but their providers’ share prices do not always follow the same trajectory. Workspace, the FTSE 250 real estate investment trust and another big supplier to the capital’s flat-white fuelled entrepreneurs, has endured a rocky ride since it was tipped by Questor in late 2017. Thankfully, it is now back in positive territory.
IWG’s recent history has been no less tumultuous. The shares dropped from 300p last August, when bid talks ended, and have yet to recover. Dixon, who owns a 27pc stake, is investing hard as competition toughens. Some company watchers were relieved that annual figures in March were not accompanied by another downgrade.
- Read Questor’s rules of investment before you follow our tips
In fact, cash flows were reassuring and the dividend came in higher than expected.
Trading in Britain still looks weak and last year’s profit contribution slid by 34pc. Dixon prefers to point to IWG’s performance in America, where it has the biggest network of serviced offices and will this year open in its final state, Alaska.
Investec, the house broker, last month cut its forecast for this year’s profits by 8pc. Numbers are being reined in as IWG invests more in marketing and opening new sites on top of 299 new locations in 2018.
Around £300m a year is being ploughed into capital expenditure, with much attention lavished on the group’s WeWork-like Spaces format, which now contributes more than 10pc of sales and is profitable in its own right. The division is rumoured to be of interest to buyers who would carve it out of IWG to tap into the flexible working revolution.
Dixon has advised investors to expect significant corporate activity this year, not least in the area of franchising. A third of IWG’s space growth last year came through the capital-light route of licensing its brand to landlords.
There is more to come. IWG is already setting out a scenario whereby a third of its business is company-owned and two thirds run through similar partnerships.
The idea has analysts salivating over significant cash returns of the like that InterContinental Hotels Group distributed when the Holiday Inn and Crowne Plaza owner sold off swathes of bricks and mortar and turned itself into a brand manager.
That is a long way off. As analysts at RBC put it succinctly, after a three-year period in which annual underlying earnings have been £186m, £164m and £156m, and net debt has more than tripled to £461m, it is perhaps no surprise that Dixon is not being given the benefit of the doubt that the future is rosy. A trading statement on May 1 may help his cause.
Something else for investors to get their heads round are new accounting rules concerning property leases. The rules will not affect IWG’s overall cash flows but result in higher charges in the early years of a lease and in effect move the group’s ratio of net debt to earnings from 1.2 times to 4.8 times.
Trading at 20 times this year’s forecast earnings, the stock is best avoided for now.
Questor says: avoid
Ticker: IWG
Share price at close: 275.7p
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