Earlier this month, IWG – which was formerly known as Regus – posted a 7% drop in 2018 pre-tax profit to £138.7mln, reflecting the impact of store closures and openings.
However, revenue increased 9.7% to £2.5mln and the company said it has seen a strong start to 2019 as it takes action to deal with underperforming parts of the business.
RBC raised its recommendation on the stock to ‘sector perform’ from ‘underperform’ and lifted its price target to 260p from 200p, saying the 2018 results were in line with its forecasts and the outlook was positive.
READ: IWG shares jump as serviced offices group posts strong growth in revenues, driven by overseas operations
“A strong acceleration in mature like-for-like growth in the fourth quarter and positive mature gross margin momentum were the key positives,” the broker said.
“As has become the norm, new centre openings were higher than expected at 299, with growth capital expenditure also higher.”
The broker raised its 2019 revenue assumptions to reflect higher opening and quicker ramp-up of new spaces but it has left its earnings per share (EPS) forecasts unchanged.
Tough for investors to give benefit of the doubt on IWG's long-term potential, RBC says
IWG chief executive Mark Dixon has said he believes that the market is not valuing the business properly.
“However, whilst we respect his view, any business that has delivered three years EBITA of £186mln, £164mln and £156mln whilst debt has risen from £151mln to £461mln AND has shown negative EPS momentum AND has had several prospective private equity bidders walk away, is unlikely to be given the benefit of the doubt by the market, ”RBC said.
“With aggressive opening continuing, which dampens profits and cash flow, we think it is going to be tough for investors to give the benefit of the doubt on the long-term potential - especially at a time when cyclical concerns are apparent.”
Last August IWG walked away from takeover talks private equity firms Starwood Capital, TDR Capital and Terra Firma because they were not going to make a bid that valued the company highly enough.
'Significant potential' for shareholder returns through franchise model
RBC said: “We think IWG is in a much better position to hit numbers this year, which will be a good starting point to rebuilding confidence.
“In addition, if the group can demonstrate potential value from going down the franchise route, then this could be a further catalyst.”
The broker said there were “clearly lots of uncertainties” but if IWG was successful in pursuing a franchise model the return on capital employed and risk profile of the group could “change dramatically” and there would be “significant potential” for returns of cash to shareholders.
“With numbers intact and the potential for value demonstration from franchising, we now see risk-reward more evenly balanced and upgrade to sector perform (from underperform).”
Shares were little changed in late-morning trading to 260.8p.