Flexible office landlord IWG's shares sink after closures widen losses

The market reaction to IWG's (IWG) results for the 2023 calendar year offers a powerful lesson: you cannot mask a poor performance with dividend payments.

The shares sank 5 per cent on the morning the flexible office operator revealed pre-tax losses had widened as it spent £149mn closing 159 unwanted sites. The numbers were worse than consensus forecasts had predicted and came despite revenue rising, thanks to a net increase in centres from 328 openings.

Even though losses per share rose, IWG reintroduced its dividend at 1p per share as flagged at the end of last year, with a progressive policy that promises flat or rising future payments. This move helped spark a rally for the shares in December, but unless IWG returns to profit, those payouts will remain uncovered by earnings.

The investment case depends on the future. Consensus forecasts anticipate IWG will be back in the black this year, and post adjusted earnings per share of 1.94p this year. Analysts then see that figure doubling each year to reach 10.2p by 2026.

However, considering this year's performance and how wafer-thin IWG's pre-tax margins are even in good times, such forecasts look overly bullish. And, even if you assume they are correct, IWG still looks overvalued

We have long argued that IWG has an inherently flawed business model. It makes money by leasing offices and then sub-leasing them on flexible terms. This generates billions in revenue, but the cost of leasing and offering a service is too high for the numbers to stack up. Meanwhile, the company has a large debt pile (even if you ignore its leases) and practically zero shareholder equity. Sell.

Last IC view: Sell, 151p, 8 Aug 2023