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Buy IWG's consistent growth

IWG looks to take advantage of tech disruption
July 13, 2017

IWG (IWG), formerly named Regus, considers itself to be at the forefront of the workplace as a service (WaaS) revolution. With several well-established flexible workspace brands operating across more than 1,000 towns and cities in 100 countries, IWG believes it has the scale and skills to service companies of all sizes for which technological advances are "making physical distance irrelevant". And its partnership model, whereby it acts as the middle man between property owners and flexible-workspace occupiers, means it is able to expand with less need for capital while largely avoiding the risk associated with long leases and freeholds. But while the talk of disruptive technologies and “capital-light” business models is exciting stuff, at its heart IWG still looks a classic cyclical play. So the fact that a temporary drop in revenues at its mature centres seems to have bottomed out at the end of last year is also key to the shares' allure.

IC TIP: Buy
Tip style
Growth
Risk rating
Low
Timescale
Long Term
Bull points

Low price/earnings growth ratio

Rapid network growth

Capital-light partnership model

Sales recovery at mature centres

Bear points

High lease commitments

Large sales by chief executive

The confidence IWG has in the promise of its end markets can be seen in its historic record of workstation and location growth (see chart below). And with trading conditions strengthening across key geographies since the start of 2017, confidence appears to be on the rise, with management recently increasing its plans for investment in the 2017 financial year from £130m to £230m, representing 280 locations covering 4.8m square feet of office space.

The fact that the recently announced spending increase reflects the purchase of freeholds and long leaseholds goes somewhat against the company's stated intention of increasing its focus on partnering with property owners. However, IWG's size provides it with scope to take a diverse range of approaches to growth and increased partnering remains a core objective.

The company also has plenty of financial headroom for growth, with year-end net debt standing at £151m compared with its key revolving credit facility of £550m, which runs to 2021. True, this needs to be seen in the context of the group's significant rent commitments. When the group last reported, operating lease liabilities stood at an eye-catching £4.4bn, with £3.3bn due within the next five years.

The rapid expansion story of recent years was tempered somewhat in 2016 due to a decline in revenues at mature centres, which in part reflects some internal reorganisation of the business to position it better for future growth. Importantly, this trend now looks as though it is reversing (see chart above). After going negative in the second quarter of 2016, year-on-year mature revenue growth bottomed at -6.1 per cent in the final quarter, but had bounced back to -2.5 per cent in the first three months of 2017. By May management said this had spread to the UK and Asia Pacific. Broker Peel Hunt gives it another one to two quarters until year-on-year mature revenues are back on the rise.

A quarter of IWG's shares are owned by Mark Dixon, the founder and chief executive. He has a tendency to sell down his stake in large chunks, offloading around £196m-worth since September last year. Ordinarily this could be seen as a warning signal, but given his large remaining holding and lack of connection between previous sales and share price movements, we don’t see this as a cause for undue concern.

IWG (IWG)    
ORD PRICE:324pMARKET VALUE:£2.96bn
TOUCH:323.6-324p12-MONTH HIGH/LOW:392p224p
FORWARD DIVIDEND YIELD:2.0%FORWARD PE RATIO:14
NET ASSET VALUE:81p*NET DEBT:

20%

Year to 31 DecTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20141.68877.24.0
20151.9313011.04.5
20162.2317514.85.1
2017**2.3921318.15.6
2018**2.6127723.56.4
% change+9+30+30+14
Normal market size:7,500   
Matched bargain trading    
Beta:0.80   

*Includes intangible assets of £738m, or 81p a share **Forecasts Investec, adjusted PTP and EPS figures