Analysts expect international flexible office space provider Regus (RGU) to more than double EPS over the next two and a half years and predict that underlying EPS from the group's mature centres could soar to 30p-35p by 2016. So, for investors prepared to look beyond a high historic PE ratio and the short-term costs of expansion, Regus has begun to look like a classic low price-to-earnings-growth (PEG) play. Indeed, the shares boast a PEG of just 0.7 based on consensus long-term EPS-growth forecasts, which when coupled with the group's strong financial position and credible expansion plans, makes them a buy.
- Benefiting from changing working patterns
- Robust mature estate
- Expanding fast
- Low PEG
- Uninspiring dividend yield
- Shares on conventional PE measure
There's presently a big structural shift taking place in the corporate world towards more flexible and mobile working arrangements. For example, for small companies there's significant savings to be found from hiring office space on a flexible basis. And flexible office solutions also allow larger companies to build a presence in local markets without the cost of establishing permanent regional bases. That demand is proving great news for serviced officer provider Regus (RGU), as illustrated by the group's impressive first-quarter trading update last month.
That revealed a chunky 18 per cent year-on-year jump in first-quarter turnover - helped by an initial contribution from the 64 business centres that came with February's acquisition of MWB Business Exchange. Decent progress is also being made among the group's mature centres - which represents 77 per cent of the portfolio - and first-quarter revenue there rose by a solid 5.2 per cent. Occupancy is high at the mature centres, too - 85.8 per cent at the full-year stage - and these operations have become an impressive cash cow generating free cash flow of £144.4m in 2012.
But it's the group's newly opened centres where Regus's growth prospects are to be found. In the first quarter alone, 100 new centres were added, including those from the MWB acquisition, and management plans 350 for 2013. By the end of 2014, management expects the estate to have reached some 2,000 centres compared with 1,411 at the end of last year. Spending associated with the expansion is hitting earnings but as these centres mature earnings kick in. A look below the bonnet at forecasts for mature centre EPS, which ignores new opening costs, shows just how powerful the growth trend is expected to be (see table).
| 2012 | 2013* | 2014* | 2015* | |
|---|---|---|---|---|
| Adjusted basic EPS | 8.0p | 8.7p | 12.0p | 16.4p |
| Mature-centre EPS | 14.0p | 16.7p | 19.4p | 25.2p |
| PE (adjusted basic EPS) | 21 | 19 | 14 | 10 |
*Numis Securities forecasts
The prediction in the table are based on flat gross margins, but Regus has high levels of fixed costs, which means improvements in the trading environment, such as occupancy levels and workstation rental rates, would be expected to substantially boost these numbers. Numis thinks mature centre earnings of 30p-35p could be achievable by 2016. Margins are also sensitive to any deterioration in trading conditions, though.
REGUS (RGU) | ||||
|---|---|---|---|---|
| ORD PRICE: | 165p | MARKET VALUE: | £1.6bn | |
| TOUCH: | 164-165p | 12-MONTH HIGH: | 178p | LOW: 82p |
| FWD DIVIDEND YIELD: | 2.2% | FWD PE RATIO: | 20 | |
| NET ASSET VALUE: | 56p | NET CASH: | £120m | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 1.04 | 9.20 | 0.30 | 2.60 |
| 2011 | 1.16 | 49.4 | 4.30 | 2.90 |
| 2012 | 1.24 | 85.1 | 7.50 | 3.20 |
| 2013* | 1.51 | 96.8 | 8.10 | 3.60 |
| 2014* | 1.72 | 143 | 12.0 | 4.00 |
| % change | +14 | +48 | +48 | +11 |
*Numis Securities' forecasts Normal market size:10,000 Matched bargain trading Beta: 1.50 | ||||
The group also looks able to sustain that investment without taking on stacks of debt. At the end of 2012, Regus boasted a hefty £120m cash pile, which includes £199m of customer deposits. Not all of that cash was available for use, with £64.7m set aside to cover bank guarantees and the costs of funding the MWB Business Exchange acquisition. But when these resources are added to the cash generative nature of the mature estate, Numis expects the group to end 2013 with £7m of net cash, which becomes net debt of just £8m in 2014, before returning to a £12m net cash balance in 2015.
Regus isn't overly exposed to the UK's poor economic conditions, either. In 2012 only 18 per cent of the group's mature revenues were generated in the UK and those operations contributed just £37.9m to profits. In fact, 43 per cent of it mature revenues come from the Americas, where profits rose 15 per cent last year to £152.9m. Next comes the group's Europe, Middle East and Africa operations, which generated nearly a quarter of mature revenues in 2012. And Asia Pacific contributed 15 per cent of revenues and profits there jumped 19 per cent last year to £53.5m.
