Nobody could accuse Mark Dixon, the founder of Regus in 1989, of a lack of confidence in his product. The provider of temporary office accommodation, which includes among its customers large corporations as well as the expected techie start-ups, has doubled in size over the past four years and in the first half of this year opened its 2,000th centre.
He expects to see another 450 open this year and the same in 2015, so clearly that rate of expansion is accelerating. Regus has 85 per cent of its revenues outside the UK and believes that its model is equally suited to high-growth developing economies, such as India and Botswana.
This expansion costs money. Regus shares wobbled ten months ago when Mr Dixon pointed out this obvious fact, and analysts cut their near-term profit forecasts. The same happened yesterday, when he repeated his ambitions. One broker cut its eps figure for this year by a third and the shares fell 17½p to 179p.
Mr Dixon has no idea how far his company can grow. He was overly ambitious before and some doubters remain. The shares, as the graph shows, are back to where they were a year ago.
The halfway figures were positive enough, although there was an inevitable currency hit. Profits before tax were flat at £31 million on a reported basis, though they would have been up 23 per cent but for currency movements. This is not really a problem, because Regus can invest those overseas earnings, rather than convert them into sterling.
The best measures are occupancy rates, which remain at their previous level, and operating margins at its mature offices, those opened before the end of 2012 and which therefore are contributing fully to profits. These improved from 10.6 per cent to 14.4 per cent; plainly, as Regus gets bigger without adding much to central costs, they can only improve further.
The interim dividend is raised by 14 per cent to 1¼p, though this is not really an income stock. The shares sell on a hefty 26 times this year’s earnings, but that is plainly distorted by that heavy investment programme. Regus, therefore, is one of those companies that, if you invest in it, you should be prepared to stay in for the long term.
Revenue £805m
Dividend 1 ¼p
14.4% Operating margin at mature offices
My advice Buy long term
Why The business is growing fast, with strong potential in developing markets, It may take a while for the benefits of that investment to show
If some analysts’ forecasts for the half-year for Petrofac were too high, the board says, then those analysts weren’t listening. It wouldn’t have been the first time.
The oil and gas engineer has had a difficult few months. There was a profit warning in the spring. Its ambitions for the integrated engineering services division, which was to have provided much of the growth, have had to be scaled back.
It was perfectly clear that 2014, more so than normally, was to see far more earnings in the second half than the first, 75 per cent or so. This is because three large contracts worth almost $8 billion came to a close last year, including the biggest in the company’s history, in Turkmenistan. Other projects have been started, but are not yet at their full earnings potential. Petrofac tends to book the majority of earnings in the second half, as they are more easily recognisable by then.
As the first-half figures undershot, the shares lost 3p to £11.23. The company has confirmed earlier profit expectations of between $580 million and $600 million, as extra ground is made up, but net profits came in 44 per cent lower at $136 million. Earnings at its offshore projects and operations side were wiped out by those seasonal factors. The halfway dividend is held at 22 cents and last year’s total will be maintained.
The shares sell on about 11 times this year’s earnings. The oil services sector has had a tough time, as investment is cut, with several profit warnings. That multiple now looks more reasonable, but there seems to be no reason to chase the shares for now.
Revenue $2.5bn
Dividend 22 cents
My advice Hold
Why Profits will recover, but no guarantee when
A report at the weekend from a think-tank suggested that the regulated London bus market was providing a much better service than in the regions, which have been suffering from local authority spending cuts. The London bus operation was the standout from Stagecoach’s trading statement for the 12 weeks to July 20, with an 8.7 per cent rise in revenues on a strictly comparable basis.
There were a couple of special factors, though: Stagecoach had won a couple of contracts that were feeding through; and one of the other main drivers is continuing population growth. The company is still adding to revenues on regional routes, the original core business, against the trend of a shrinking market.
The main engine for future growth is, as ever, the number of rail franchises coming up for grabs. Stagecoach is, with Virgin, already on the west coast main line and hopes to add the east coast route later in the year. It hopes to retain the South West and East Midlands Trains franchises in due course.
That uncertainty makes it hard to take a view on the shares. Up 5¾p at 365¼p, they sell on 14 times earnings and remain a solid “hold” rather than a raging “buy”.
Revenues 8.7% up at London buses
My advice Hold
Why Uncertainties at rail franchises remain
Market sweetener
I have suggested before that PureCircle is one of the biggest companies — market cap more than £1 billion — that no one has heard of and one that has yet to fulfil its potential. It makes stevia, a natural sweetener but one not yet widely adopted in the drinks industry. A note from Numis Securities suggests Coca-Cola may use the substance for its Coca-Cola Life product, to be launched in the United States. This may increase mainstream acceptance for stevia. Still highly speculative, in my view.
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