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IWG’s franchising strategy could see share price “more than double”, says Peel Hunt

The broker upgraded IWG to ‘buy’ from ‘hold’ and lifted its target price to 351p from 190p, saying the move to potentially franchise out whole parts of the business “could release a lot of value”
Office space
“[IWG] would obtain cash upfront, build a faster growing business and allow the deconsolidation of leases" through franchising, Peel Hunt said

IWG PLC (LON:IWG) shares were lifted in late-morning on Thursday after a bullish note from Peel Hunt said the office space firm could see its share price “more than double” if its franchising strategy paid off.

The broker upgraded FTSE 250 company to ‘buy’ from ‘hold’ and lifted its target price to 351p from 190p, saying the move to potentially franchise out whole parts of the business “could release a lot of value”.

READ: IWG upgraded by RBC on in-line full-year results and positive outlook

“[IWG] would obtain cash upfront, build a faster growing business and allow the deconsolidation of leases … return to franchisees on cash invested in growth could, on a levered basis, rise to high-teen percentages, which is attractive.”

While the company had talked about moving to a franchise model for over a decade, analysts said this time it looked “more serious”.

Last August, IWG walked away from takeover talks with private equity firms Starwood Capital, TDR Capital and Terra Firma because they were not going to make a high enough bid, with chief executive Mark Dixon complaining that the market was not valuing the business properly.

With this in mind, analysts said Dixon’s new strategy “makes sense” for the firm.

While Peel Hunt said the strategy was still in early days, they saw momentum building for the company once the first franchise deals had been announced.

The broker even said that IWG’s shares could reach as high as 701p, although this was “heavily caveated” by the lack of any current deals and the valuations of parts of the business.

Peel Hunt isn’t the only broker to have given a vote of confidence in IWG’s new strategy, with RBC upgrading the firm to ‘sector perform’ from ‘underperform’ and lifting its target price to 260p from 200p in a March note.

The Canadian bank said that if the firm could successfully pull off a franchise model there would be “significant potential” for returns of cash to shareholders.

Shares in IWG were up 4.5% at 274.4p.

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