As if dealing with the threats posed by Workspace, WeWork and other new office providers wasn’t enough for IWG, along comes the coronavirus-inspired shift to working from home. According to Mark Dixon, IWG’s founder and chief executive, last year was the most difficult in the company’s 32-year history, but, while the persistence of Covid-19 is set to make life tough again in 2021, he’s convinced that the business stands to be a big winner from changes in working practices as the pandemic subsides.
In the three decades or so since it was founded, IWG has grown to provide serviced office space in 3,358 locations across 120 countries and to employ 13,000 staff. Its proliferation of smaller offices in the regions as well as the world’s big cities means that it is nicely placed to capitalise on a likely move away from, well, capitals, according to its boss. The hybrid model that involves working from home, attending digital meetings but also spending time in the office similarly will be good news for the FTSE 250 group, he reckons.
Indeed, speaking to CityAM this week, Dixon, 61, hailed just such a tailored contract signed less than two months ago with Standard Chartered, under which IWG provides office space for the emerging market bank’s 95,000 staff.
He may well turn out to be right, but in the meantime IWG has been reporting losses, cutting costs and reducing the size of its estate. It has faced a backlash from tenants, too, after asking them to sign longer leases in exchange for agreeing rent cuts or deferrals. The company’s shares remain well below their pre-pandemic level.
Adapting to challenges is not a new experience for IWG. Until it suffered a governance crisis in 2019, WeWork seemed to be a serious threat, with its millennial-friendly flexible or shared offices available for short lets of as little as one month. Faced by the prospect of WeWork and others eating its lunch, IWG changed its model two years ago to make itself more flexible and less capital-intensive. Where previously it would buy the lease on a property and charge tenants rents, increasingly it sells its leases to third-party landlords under franchise agreements that give them the right to use the brand name. This provides revenues that are recurring, fixed and manageable and gives it cash from upfront payments.
It remains exposed, of course. According to HSBC, about 63 per cent of the portfolio uses the conventional leasehold model and an increased churn in customers has hit revenues, now expected to be about £2.45 billion for the 12 months to the end of December, against £2.65 billion the previous year. Taking provisions for shutting locations, Covid-specific measures and providing help to tenants is also taking a bite out of its earnings: the company is estimated by Investec to be heading for a pre-tax loss of £113.7 million for the year.
Still, there will be life after the pandemic and, once something resembling normality resumes, IWG has plenty of qualities. Reducing the estate by an estimated 8 per cent gives it flexibility to choose the locations it wants to be in in response to a new working world. It has opened offices, about 120 last year, mainly outside city centres. If Dixon is right, IWG will be in a strong position to capitalise on changes to how we work. Debt, stripping out lease liabilities, is a manageable £350 million or so as of the year-end.
The shares, off 3p, or 0.9 per cent, to 347¾p, trade for 31.2 times Investec’s forecast earnings for a yield of barely 0.9 per cent. That is unlikely to tempt the buyers, but existing investors should hang on.
Advice Hold
Why The company could do well once the pandemic dissipates, but the shares are not very attractively priced
Abcam
Timing, they say, is everything, so Abcam’s might be considered unfortunate after it published the details of an ambitious growth drive six months before the research laboratories it serves were forced into lockdown.
The Aim-quoted biotechnology company told investors in September 2019 that it was planning to double its revenues to between £450 million and £500 million by 2024. At that moment, the target seemed credible, not least because it had achieved it once before, but how about now, less than 18 months on?
Abcam was founded in 1998 by Jonathan Milner, 55, a University of Cambridge scientist. It supplies research labs in more than 130 countries with about 100,000 products, including antibodies, to help them to carry out their tests. The business has grown rapidly since it was listed in 2005 and is now among the top five most valuable stocks on London’s junior market, with a quotation worth just under £3.9 billion.
Under the plan, Abcam plans to invest in growth by expanding its product range, moving into new countries and pursuing bolt-on acquisitions. When labs worldwide were forced to shut, its ability to achieve its goal suddenly looked uncertain, but almost a year later the company’s dream is still alive. Indeed, Abcam has pulled off several acquisitions and raised $180 million from a share listing on Nasdaq. The enforced closure of labs lasted barely two months and its customers, including in China and America, are back at full capacity or are close to it. That helped it to record flat revenues over the year to the end of June and it is on course to increase its sales over the subsequent six months by more than 8 per cent compared with the same period the previous year.
On the downside, pre-tax profit in the full year fell from £56.4 million to £8.4 million, owing to investment costs and one-off charges, and the full-year dividend was suspended to increase financial firepower and is unlikely to be revived for at least three years with growth a priority.
Abcam’s shares, up 7p, or 0.4 per cent, at £17.16, trade for an eye-watering 66.6 times Morgan Stanley’s forecast earnings. That’s too high for this observer.
Advice Avoid
Why Quality growth business but shares are very expensive
