Regus
For many years, Regus sat comfortably as the king of the serviced officer providers. Under its founder Mark Dixon, a former hotdog salesman, the company rapidly expanded across the world and (bar nearly going bust in 1990) became a roaring success, with more than 3,000 offices across the world. Wework has changed all that.
The privately owned, New York-based company has revolutionised the world of serviced offices into hip operations that come with perks such as coffee and beer on tap, quirky furniture and pool tables, as well as networking events, fitness classes and communual spaces that allow businesses to swap ideas.
Among millennial entrepreneurs looking for space to take by the week or even the hour, Regus quickly became an afterthought, with associations of drab meeting rooms and clunky desktop computers.
Investors seemed to think the same. Wework has a market capitalisation that is ten times higher than Regus, now owned by IWG, a holding company, despite being in only 170 locations compared with IWG’s 3,125.
Regus responded by setting up Spaces — its own trendy co-working brand — and said that it welcomed the competition. It now has 78 Spaces locations across the world.
Yet the two companies’ outlook on London suggests that one of them could be in trouble. Last year Wework, which is backed by Softbank, of Japan, became the largest corporate occupier of office space in central London, taking 2.6 million sq ft. IWG said it had become cautious about the capital as revenue growth from London fell. The contrast in outlook to Wework left some wondering whether one company was simply more popular.
That said, Regus has been around a lot longer than Wework and has had time to learn from its mistakes, including the dangers of rapid overexpansion. The company had to seek bankruptcy protection in America during the dotcom bust as demand plummeted, leaving it with high fixed lease costs and falling rents. Something similar could happen to Wework if it continues to expand so quickly. Regus also has strength in its diversity. It operates in 115 countries and can be found everywhere from Sutton Coldfield to Buenos Aires. Its biggest market is the United States, where it makes 40 per cent of sales.
The company is increasingly going down the partnership route, co-investing with existing property investors rather than going it alone, and has slimmed down its operating model over the past two years, with fewer layers of management. It has limited debt of 0.8 times operating profits before adjustments.
All that led the company to come into the eye of Brookfield and Onex, the Canadian asset managers, who bid a slightly too optimistic 270p per share for the company in January, even if the move did come after a profit warning from IWG that knocked a third off its shares. Before the warning, its share price had been 317p. Further bids were rebuffed. Mr Dixon was reported to be keen on selling, but other directors were said to have called off the bid. The shares are now at 242½p, about 16 times forecast earnings and in line with the historical average.
Yet since the rebuffed bid, the company is looking onwards and upwards. It has lifted its dividend by 12 per cent to 5.7p on the outlook for a better year for profits in 2018, including in London. Its mature business — centres that have been owned for at least a year — had a 0.5 per cent improvement in revenue in the fourth quarter, after a 1.8 per cent decline in the previous quarter.
ADVICE Hold
WHY Given the recent profit warning and competition from Wework, as well as macro economic uncertainties, it is best to remain cautious
Intertek
Intertek is one of those companies most people will not have heard of but whose work they will encounter most days.
The FTSE 100 group, which employs more than 42,000 people in more than 100 countries worldwide, offers quality assurance testing, inspecting and certifying of hundreds of thousands of products from cosmetics to food and toys to home appliances.
It also works on quality assurance in industrial areas such as oil and gas. André Lacroix joined as chief executive in May 2015 after the oil slump hit. It was forced to write down the value of the oil and gas division in 2016, but its performance otherwise has been strong.
Shares in Intertek have risen from about £27 when Mr Lacroix took over to more than £50 yesterday, with a near-5 per cent surge on the day thanks to strong annual results. Intertek beat expectations with revenues of £2.8 billion in 2017, up 7.9 per cent on 2016, and operating profits of £468 million, up 14.2 per cent. Its operating margin was a record 16.9 per cent and it increased its dividend by 14.3 per cent to 71.3p a share. It has lifted its dividend every year since 2004 and is to increase its targeted dividend payout ratio to 50 per cent, from about 40 per cent now.
Intertek argues that it has strong growth prospects because companies are becoming more risk-conscious, regulations are getting tougher, sourcing and distribution operations are getting more complex and consumers are seeking higher-quality products. Of the $250 billion market in quality assurance, at the moment $200 billion is done by companies in-house. Intertek sees “tremendous growth potential” in persuading them to outsource and also in growing by acquisitions.
All in, it expects its products division, already delivering 75 per cent of profits, to continue growing faster than GDP. This is all very well, and should sustain dividend growth as forecast (assuming that the £25 million of one-off charges stripped out of this year’s results really are one-offs), but, with the stock already trading on a 26 times earnings multiple for 2018, this growth already appears to be baked into expectations.
ADVICE Hold
WHY Growth prospects are already in the price
