Foundations for growth at Regus

Regus hires out serviced office spaces to businesses in 850 towns and cities in Europe, the Middle East and the Americas. The provider is taking advantage of the trend towards more mobile and flexible working arrangements. For example, smaller businesses can make considerable savings by hiring out office space on a temporary basis. In response to increased demand, Regus is establishing itself in more towns and cities internationally. During the first quarter of this year alone, the group added 81 locations to its network. An uptick in demand means the group has been performing strongly. Last year, despite negative currency movements, sales grew by 9 per cent to £1.68bn. Stripping out currency effects, sales were 16 per cent ahead while operating profit rose by more than a quarter on the previous year to £104m.

While its network has grown rapidly over the past few years, it is still a fraction of management's long-term target. At the time of its full-year results in March, chief executive Mark Dixon told the IC the group aims to establish a 20,000-strong network of sites, which it would take around 11 years to reach at its current rate of expansion. However Mr Dixon has also promised to not "slaughter the balance sheet" as Regus strives to reach this target.

While debt has been rising fast, "slaughtering" the balance sheet does not currently look a pressing concern, although it is worth bearing in mind that many of the group's liabilities come from its £2.9bn of "off-balance-sheet" property lease commitments, which stretch out over several years. The group moved into a net debt position of £57.2m in 2013 compared with a net cash position of £120m in 2012 after investing £301.1m in 448 sites. However, management has since reduced net debt to £50m on a pro-forma basis, or 9 per cent of total equity, with the help of £84m of property sales. And £5m was cut from group debt during the first quarter of this year, despite investing £33m in new locations.

The group is also exploring ways to limit its overheads while continuing to expand rapidly. To do this Regus is opening offices in smaller cities and locations with lower start-up costs, such as railway stations. It is also partnering with other companies, primarily in the property sector, to deliver projects. This helped overhead growth in 2014 keep to just 4 per cent despite an impressive geographical roll-out of workspaces.

At the time of Regus's first-quarter trading update in April, management said it had identified about 500 potential locations for investment this year, which will cost around £180m. And Regus's mature portfolio - property bought prior to 31 December 2011 - is generating cash to feed back into the expansion. Last year mature locations generated a post-tax cash return of 20.9 per cent. Admittedly, gross margins on the estate fell 1.5 per cent to 22.9 per cent during 2014. However, this was due to the increased proportion of immature properties in the portfolio which required early-stage promotional activity. Strip these out and gross margins on the mature portfolio grew 0.9 per cent to 27.7 per cent, on a like-for-like estate.