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Credit Suisse double-upgrades IWG to ‘outperform’ from ‘underperform’ on Japan strategic partnership news

“It is early in the process with limited tangible progress but management is clear that it has received significant interest at attractive prices for certain IWG assets,” the Swiss bank's analysts said
Serviced office
Credit Suisse raised its price target for the FTSE 250-listed firm to 328p from 200p

Credit Suisse has double-upgraded its stance for IWG PLC (LON:IWG) to ‘outperform’ from ‘underperform’ following news the firm has inked a strategic partnership in Japan which it thinks is the key change in a strategic pivot for the serviced offices group towards a franchise business.

The Swiss bank raised its price target for the FTSE 250-listed firm to 328p from 200p, with the shares having jumped nearly 24% on Monday to 341.50p.

READ: Office giant IWG sells off Japanese business for £320mln

In a note to clients, the Credit Suisse analysts said the upgrades come as IWG “begins the evolution towards a franchise model with consequent benefits to financial leverage, return on capital, volatility and, in our view multiples.”

They added: “It is early in the process with limited tangible progress but management is clear that it has received significant interest at attractive prices for certain IWG assets.”

The analysts pointed out that selling mature centres will negatively impact IWG’s pre-tax profit (PTP) but reduce debt, raise ROIC (return on invested capital) and improve the quality of earnings.

They said: “We estimate that the sale of 500 mature centres in 2020E would reduce PTP by 12% but cut debt by c90% and raise ROIC from c.10% to c15% (all pre-IFRS 16), which we expect to drive positive valuation re-rating.”

The analysts concluded that, assuming constant relationship between ROIC and the group’s EV/EBITDA multiple, this would boost IWG’s share price by 37%.

They added the key catalyst will be the announcement of centre sales to franchise operators and the terms of that deal.

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