Investment Summary

1. The company is a global market leader in workspace and coworking providing business with its network almost six times larger than its nearest competitor.

2. The company provides world-class operational support which enhances efficiency and reduces costs for its franchise partners.

3. The Group has an established customer base who use its products and services every day.

4. The company is trading near its 52-week low, which makes an excellent opportunity to buy this value stock.

Business Overview

Switzerland based International Workplace Group (LON: IWG) Plc is a co-work and workspace company. The company has a global presence. They help more than 2.5 million people and their occupation to work more productively. The group is owned majorly by the institutional investors - Dixon, Toscafund Asset Management LLP, M&G Investment Management Ltd. which are among the top institutional investors in the revolutionary workspace company. It is a multinational company that provides workspaces, communities and services to companies to find workspaces according to their needs and caters to demand by start-ups, small and medium-sized enterprises and large multinationals in over 1,000 towns and cities across more than 110 countries. The operations are differentiated in four geographical segments, namely United Kingdom, Asia Pacific, EMEA and the Americas.

Key Statistics



Top Shareholders


(Source: Thomson Reuters)

Strong Business Network


(Source: Preliminary Presentation, Company Website)

The Group has 3,388 business locations in more than 110 countries. 277 new locations were added in the year 2019. Rationalisation of 195 locations were made in the year 2019 and the Group witnessed record space opening in the year 2019.

Company’s Growth Trajectory

Network Coverage Development


(Source: Preliminary Presentation, Company Website)\

In the last 30 years, the Group’s network coverage has multi-folded from a single network in 1989 to 3,388 network coverage in 2019.

Company’s Brands


(Source: Preliminary Presentation, Company Website)

In the last 30 years, the Group has consistently invested in its brands and produced brand value. Its brands include Regus, Spaces, HQ, EasyOffices, etc.

Products & Services Offered

Following are the products and services offered by IWG:
 

1. Customer reach

2. Industry leading platform

3. Strong and diversified brands

4. Instant revenue

5. Constant innovation

6. Design & Branding

7. Marketing support

8. Membership system

9. Loyalty system

10. Procurement & cost savings

11. Logistics system
 

Differentiating Factors
 

1. Focus on operational efficiency

2. Economies of scale

3. History of continued innovation and investment

4. Global coverage

5. Best in class global technology and infrastructure platform

6. Unrivalled brand portfolio
 

Business Model

The Group follows five steps which constitute its business model.

1. The company selects the best location and according to business requirement choose small, medium or large building spaces.

2. Maximise return on every square foot with the help of its space planning team.

3. Sell workspace and services through its global marketing and sales platforms.

4. Increase revenue and profits by pitching and selling additional products and services.

5. The company retains its existing customers by providing excellent services and win new business to drive network growth.
 

Key Growth Drivers
 

1. Environment

2. Huge environmental advantage

3. Less commuting; less space

4. Cost Efficiency

5. Cheaper; more than 50 per cent saving

6. Higher productivity

7. Fulfilling employees needs

8. Working closer to home

9. Better work environment

10. Secure technology platform

11. Cybercrime means high security top of list
 

Market size Prospects

The Group expected around 30 per cent of the US office market would be flexible space by 2030. Based on industry revenue, workspace market size is expected to grow to USD 52 billion in 2022 from USD 25 billion in 2017. In 2012, the market size was USD 10 billion.

Strong Client Base

The Group has a strong client base with some of the industry leaders are having enterprise accounts with the company. Their clients include Google, HSBC, Nike, Deloitte, Nokia, etc.


(Source: Preliminary Presentation, Company Website)

Robust outlook for 2020

The company is expecting strong growth from current franchising with excellent momentum in partnering discussions. The Group has a robust balance sheet and it is well placed to take advantage of strong demand globally. The Group is not expecting any immediate effect on its performance due to Coronavirus outbreak. However, if the crisis escalate then it can see some impact on its business.

Recent News

On 3^rd March 2020, the company announced that it would increase the share repurchase programme back to £100 million. IWG announced that it had made agreement with Investec Bank Plc to repurchase ordinary shares in IWG on its behalf during the period from 3^rd March 2020 to 1^st March 2021.

Financial Highlights – Financial Year 2019


(Source: Preliminary Report, Company Website)

In the fiscal year 2019, the company’s revenue grew by 9.2 per cent to GBP 2,653 million as compared to GBP 2,402.1 million in the fiscal year 2018 due to record enquiries as companies focus on sustainable and more flexible working practices, new enterprise account wins across all geographies and strong growth from existing enterprise accounts. Profit before tax during the period was GBP 489.5 million, up by 253 per cent against GBP 138.7 million in the same period last year. Profit after tax increased by 376 per cent to GBP 503.1 million in FY2019 versus GBP 105.7 million in the FY2018. The Group’s EPS grew by 383 per cent to 56.4p during the period as compared to 11.7p in FY2018. Net debt of the company reduced to GBP 294.1 million in FY2019 as compared to GBP 460.8 million in FY2018.

Key Performing Indicators

Total Revenue


(Source: Thomson Reuters)

The revenue of the company grew to GBP 2,653 million in FY2019 from GBP 1,927 million in FY2015, reflecting a growth of 8.32 per cent on a CAGR basis.

Gross profit


(Source: Thomson Reuters)

The gross profit of the company grew to GBP 566.40 million in FY2019 from GBP 428.40 million in FY2015, giving growth of 7.23 per cent on a CAGR basis.

Operating Income


(Source: Thomson Reuters)

The operating income of the company grew to GBP 287.9 million in FY2019 from GBP 160.1 million in FY2015, giving growth of 15.72 per cent on a CAGR basis.

Financial Ratios

 

The reported gross margin in FY19 was 21.30 per cent against the industry median of 70.10%. The reported operating margin was 10.90 per cent for the FY19. Net margin reported was 2.90 per cent for the fiscal year 2019, lower from the industry median of 72%. Return on equity for the same period stood at 9.60 per cent. On the liquidity front, IWG Plc current ratio stood at 0.36x. On leverage front, the debt-equity ratio of the IWG Plc’s was 7.84 i.e. the company is more leveraged than the industry with debt-equity ratio of 0.74.

Share Price Performance


Daily Chart as on 16^thMarch 2020, before the market closed (Source: Thomson Reuters)

On March 16, 2020, at the time of writing (before the market close, at 8:20 AM GMT), IWG Plc shares were trading at GBX 193.50, down by 13.11 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 470.4/GBX 145.80. Stock’s average traded volume for 5 days was 6,634,339.40; 30 days – 3,074,715.87 and 90 days – 2,116,011.97. The group’s stock is reflecting higher volatility as against the benchmark index based on the company’s beta of 1.727. The outstanding market capitalisation was around £1.94 billion, with a dividend yield of 3.12 per cent.

From the technical standpoint, 14 days-Relative Strength Index of the stock is hovering near the oversold zone, which is strengthening the upside move.

Valuation Methodology

Method 1: EV to EBITDA Approach (NTM)



To compare IWG Plc with the industry, EV/EBITDA multiple has been used. The Average of EV/EBITDA (NTM) of the company’s industry was 5.90x (approx.)

Method 2: Price to Earnings Approach (NTM)
 


To compare IWG Plc with its peers, P/E multiple has been used. The peers are HomeServe Plc (NTM P/E was 20.75), Rentokil Initial Plc (NTM P/E was 27.60), Intertek Group Plc (NTM P/E was 20.97) and Hays Plc (NTM P/E was 12.41). The average of P/E (NTM) of the company’s peers was 20.43x (approx.)

Valuation Metrics


(Source: LSE)

As on 28^th February 2020, the Price to Earnings ratio of the IWG Plc’s was around 29.80which was lower as compared with the industry which shows that the company is underpriced than the respective industry. The company’s EV/EBITDA multiple is 8.9x which was lower as compared with the industry which shows that the company is underpriced than the industry.

 

(Source: LSE)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that’s driving ROE.

IWG V/S FTSE-250 Price – 1 Year


(Source: Thomson Reuters)

In the last one year, IWG Plc share price has delivered negative 10.35 per cent return as compared to negative 25.05 per cent return of FTSE-250 index, which shows that the stock has outperformed the index during the last one year.

Dividend Yield


(Source: Thomson Reuters)

IWG Plc has a dividend yield of 3.12 per cent which is higher than the industry dividend yield of 2.68 per cent and the sector dividend yield of 1.83 per cent.

IWG V/S Industry V/S Sector – 5 years


(Source: Thomson Reuters)

In the last five years, IWG Plc share price increased by 1.23 per cent which is higher than the industry growth rate of negative 0.05 per cent and sector growth of negative 5.89 per cent.

IWG Total return- 5 years


(Source: Thomson Reuters)

In the last five years, IWG Plc has delivered a total return of 10.75 per cent while the FTSE All share index has delivered a total return of negative 0.3845 per cent.

Growth Catalyst

The Group is witnessing a strong demand globally and attracting more partners to the business. As organisations increasingly searching ways to face the issue of climate change and other environment challenges, the company expects that this would increase the importance of role to be played by remote, distributed and flexible working strategies.

Conclusion

IWG is a leading global player in the Co-working space arena. Since 2013, the group has consistently maintained an EBITDA margin above 15%. The strong addition of new centres indicates the company’s strong focus on prudent capital allocation, and this has allowed them to maintain a robust financial position. The group expects the positive momentum to continue in its business operations, despite global, political and economic uncertainty. The outbreak of COVID-19 has impacted the business performance of the company due to closures of its centres in China. However, the company is reviewing developments worldwide. The Group is focussed to develop its network and its services to ensure its market leading position in the industry. The company’s business model and strategy make its growth sustainable in this period of global, political and economic uncertainty. The company’s prospects look promising and it could deliver strong returns to its investors in the long term, and this is reflected in the increased proposed dividend and new £100m share repurchase programme.

Based on the decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 145.80 (as on 16th March 2020 at 10:38 AM GMT) with double digit upside potential based on 5.90x NTM EV/EBITDA (approx.) on FY20E EBITDA (approx.) and 20.43x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).
 
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.

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