IWG is spluttering on all cylinders

It’s hard to think of a stock less attractive than IWG (IWG) right now. The flexible workspace provider’s results for the six months to 30 June this year are miserable. It has not posted a pre-tax profit or paid out dividends since 2019 and it is unclear when it will be able to do either again. The company itself does not give much guidance on this point, saying the dividend continues to be paused “given continuing macroeconomic uncertainties and geopolitical tensions”, but this is a poor excuse considering that plenty of others have been able to pay out in the same difficult trading environment.

The real reason for IWG’s dire performance and eye-watering levels of debt are that its business model is inherently flawed – and Covid-19 has simply revealed this fact. Some flexible office companies are landlords, such as Workspace (WKP), which own buildings and let them out to companies on flexible terms. Others, such as IWG or its much better-branded rival WeWork (US:WE), let the buildings and then sub-let them to companies. Both models were battered by the pandemic as the flexibility of the leases also meant the flexibility to cancel. But where flexible office landlords have been able to recover as workers tentatively come back to the office, IWG has been left with a growing pile of debt due to its lease liabilities. For flexible landlords, Covid-19 meant no income. For IWG, the pandemic meant no income plus debt.

Revenue has increased and its losses are getting smaller, but if IWG can’t make money now the threat of another recession could well kill it off completely. Oh, and did we mention the enormous premium to net asset value of this stock? Sell.

Last IC View: Sell, 362p, 9 March 2021