IWG reports record revenue but is still far from profit

IWG (IWG) posted another year of record revenue, but this growth continues to come at too great a cost for us to be anything but bearish about the flexible office operator. Its pre-tax loss was flat at £70mn, and its loss per share increased. In other words, even as revenue climbs, increased costs mean the company is still far from profit-making.

IWG pinned a lot of these increased costs on a shift in the way it does its accounting, with its results for the same period last year restated. But the picture is bleak regardless of how IWG accounts for it. Shareholders have not received a dividend payment since 2019, and the company did not indicate when they will next do so.

As we have previously argued, the problem is an inherently flawed business model. Unlike flexible office landlords such as Workspace (WKP), IWG does not own its buildings. Rather, it leases offices from landlords and then sublets them. And it hasn’t posted a pre-tax profit since the pandemic hit because the cost of running the business and paying its leases continues to be more than the revenue it brings in from those wanting IWG’s flexible office service. 

This model also means its debt – the bulk of which is leases – is eye-wateringly high. And although the debt pile has decreased since last year, this was accompanied by a drop in the value of its assets, making its net debt mountain 34 times larger than its shareholder equity.

Consensus forecasts from FactSet predict pre-tax profit by the end of this year, but we are sceptical. Even in good times, the margin for IWG’s model is wafer-thin. A business built on subletting remains unconvincing to us. Sell.