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Regus growing at the margins

Workspace provider Regus is growing margins at an impressive rate
August 25, 2015

Regus (RGU) ploughed ahead with its network expansion programme during the first half. The workspace provider added another 231 new locations; well up on the 194 it brought into play during the comparable period in 2014. Regus' total network now stands at 2,481 locations - more than double its size in 2010. This rapid growth is driving earnings for the group as its properties mature. The group's healthy pre-tax profit was boosted by the £21.3m it earned on the sale of around 70 properties, while overall cash profit grew 41 per cent to £136m.

IC TIP: Buy at 266p

Increasing demand for more mobile and flexible workspaces is driving sales at Regus. The group sets up in smaller cities and locations with relatively modest start-up costs - typically in locations such as railway stations and universities - in order to limit overheads. Indeed, overheads grew by just 4 per cent during the first half, while gross profit grew by almost a fifth to £209m. Much of this benefit is thanks to increased scale; however the group has also invested in new software to streamline back-office functions. Gross margin for properties built in 2013 more than quadruped to 18.2 per cent. Chief executive Mark Dixon says this is actually typical and margins grow at a more subdued rate once properties have matured. Even so, gross margin for its mature properties - those added in 2012 or before - also grew a respectable 90 basis points to 28.1 per cent.

Management plans to more than double the size of its network during the next five years. However, Mr Dixon says: "We won't lose the discipline on returns with investment." Its longer-term target is for a network of around 20,000 locations. The group plans to look more towards partnering with property groups, for example, in order to grow its network.

Broker Investec Securities expects adjusted EPS of 11p for the full year, up from 7.4p in 2014.

REGUS (RGU)

ORD PRICE:266pMARKET VALUE:£2.47bn
TOUCH:265-266p12-MONTH HIGH:285pLOW: 160p
DIVIDEND YIELD:1.6%PE RATIO:22
NET ASSET VALUE:58p*NET DEBT:25%

Half-year to 30 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201480531.02.61.25
201593779.17.21.40
% change+16+155+177+12

Ex-div: 3 Sep

Payment: 2 Oct

*Includes intangible assets of £608m, or 65p a share