Dr. Gleb Tsipursky – The Office Whisperer
Nirit Cohen – WorkFutures
Angela Howard – Culture Expert
Drew Jones – Design & Innovation
Jonathan Price – CRE & Flex Expert
- IWG remains profitable, reporting a 48% profit increase, but faces a low stock valuation.
- The company’s capital-light growth strategy boosts revenue but hasn’t led to higher profitability.
- Customer satisfaction issues and high debt are key challenges holding IWG back from higher growth.
Appearing above an article in Forbes magazine in June 2019, an article by hapless journalist Alex Barseghian typified the hype that surrounded WeWork in its peak bubble year.
At the time, the company was valued at $47 billion while Regus’s market cap stood at a lowly $3 billion — despite being much larger in terms of office locations and global reach.
Less than a year later, the WeWork bubble had burst in a process that led to the ousting of messianic founder Adam Neumann. Followed by its entry into Chapter 11 bankruptcy in November 2023, and an emergency reverse stock split to save its NYSE listing when the share price dipped below the $1 per share minimum for that exchange.
By contrast, Regus’s CEO, Mark Dixon is still firmly in the saddle today, 35 years after the company’s founding in 1989. The company, now known as IWG plc, is even larger and present in more countries than in 2019.
The market cap of the company, however, still languishes in the $2-3 billion range, despite the quasi demise of its largest competitor.
IWG’s share price has traded between £1.54 and £2.06 in 2024 compared to the £4.40 it saw pre-Covid in 2019.
Although WeWork has been my favorite topic for Allwork.Space articles for several years, in this piece I am going to take a look at IWG instead, and ask: Why is its share price so low, having fought off the threat of the upstart WeWork?
Market Sentiment and Competition
There are clearly macro factors at play, including market sentiment and competition.
Although IWG is profitable and has defeated WeWork, market sentiment might still be cautious due to past volatility in the flexible office space industry.
Investors may also be wary of new competitors potentially entering the market, even though there is a case to say that having another strong competitor or two might increase the overall size of the sector. This could cause big corporations to feel inclined to dedicate more of their global overhead budget to flexible space if there were two or three major players competing for their business, rather than just IWG.
Economic Influences
Economic uncertainties, such as inflation and interest rate fluctuations, can impact investor confidence and stock valuations, even for profitable companies like IWG.
I will comment more on IWG’s profitability below, but it is strong compared to at least some of its competitors, particularly WeWork.
In 2023, IWG reported a 48% increase in half-year profit, driven by high demand and improved pricing, with system-wide revenue reaching £1.68 billion.
In the first half of 2024, IWG has once again reported record revenue figures, announcing revenue of $2.1 billion (£1.65 billion) during this period.
Its EBITDA increased by 34% to £403 million, reflecting effective cost management.
In contrast, WeWork struggled with negative EBITDA margins and financial instability.
IWG’s diverse global presence and capital-light growth strategy have contributed to its robust financial performance, setting it apart from competitors like WeWork, which have faced significant challenges.
Investment Strategy
Investors may, however, have concerns about that strategy.
Whereas its expansion into new markets such as India, China, and Brazil, alongside growth in core markets like the U.K. and the U.S., has boosted system-wide revenue, the capital-light growth strategy, while beneficial for cash flow, has not immediately translated into high stock valuations.
Additionally, ongoing investments in innovation and expansion have arguably affected short-term profitability. The investment into The Instant Group in particular does not yet seem to have produced much in the way of extra profit.
Ongoing investments in innovation and expansion have arguably affected short-term profitability.
A big part of the strategy in recent years has been franchising and joint ventures.
This segment leads IWG’s expansion, supported by a capital-light growth strategy that reduces capital expenditure while expanding the network.
The system-wide revenue, which includes contributions from franchise and joint-venture partners, grew by 19% to approximately £2 billion in the first half of 2024.
This model enhances profitability by leveraging partner networks and reducing operational and financial costs, as the necessary capital is provided by the partners, not by IWG.
Demand for Flexible Space
The business has benefited from increased demand for flexible workspaces, driven by the hybrid working trend post Covid.
This has allowed the company to improve pricing across its network, contributing significantly to profit growth while effective cost controls have led to higher contribution margins — particularly in the company-owned and leased segment — enhancing overall profitability.
The level of growth varies from country to country, of course, but the long-term structural growth in flexible space that we have seen since the millennium is visible almost everywhere, and has increased since Covid.
In the U.K., the number of enquiries for flexible space has more than doubled in the last five years according to WorkThere, an online broker.
Profitability
IWG is profitable, but it may be that one reason for the lagging share price is that it isn’t as profitable as you might expect, given its market position.
So, why isn’t it more profitable?
I think there are again macro and micro reasons for the somewhat unimpressive profitability.
At a group level there is a significant level of debt despite a continuing programme of debt reduction including buyback of its convertible loan due 2027. Net debt stood at $791 million in Q1 2024, a large sum when interest rates are rising.
Perhaps equally important is the fact that, in a business where service is the key differentiator, IWG’s brands do not score well for customer satisfaction.
In a business where service is the key differentiator, IWG’s brands do not score well for customer satisfaction.
For every five star review, there is a plurality of one star complaints — for any of a wide variety of reasons, including poor service, impolite staff, incorrect billing, hidden charges, price increases or a slow response to concerns.
The overall impression you gain from reading the reviews is of a penny-pinching firm always looking for ways to charge its customers more for less.
I am sure that it is not company policy to recruit staff with the personality of Ebeneezer Scrooge, but it does illustrate the difficulty of maintaining good customer service across a business with 3,000+ locations while trying to generate good cash flow by increasing revenues and decreasing costs in order to pay off debts.
LSE vs. NYSE
Some investors would no doubt argue that being listed in London, where share prices are depressed compared to those listed on American markets, is part of the problem.
Some institutional investors have stated publicly that they want IWG to move to the U.S. But, delisting from the LSE and moving to the NYSE or NASDAQ might not be the magic bullet that those pushing for this change expect.
Even if a listing in the U.S. could be better, it might not be the best time to make the switch as London prices are unlikely to remain depressed forever, and many investors think that prices in the U.S. are over-inflated.
Switching now might just be jumping out of the frying pan into the fire.
Conclusion
There is not one single reason why IWG’s share price remains low, having traded between £1.54 and £2.06 in 2024 compared to the £4.40 it saw pre-Covid in 2019.
It is perhaps not surprising that it should be lower than 2019 given what the forced shut-downs did to all real estate based businesses. Nevertheless, what is significant is its failure to see any improvement in 2024, a year when flexible space take up has been good everywhere except some markets in the U.S.
In my view, it is the lack of a competitor at scale that dulls IWG’s edge and allows it to be mediocre more than anything else. If it had the operating margin of its much smaller competitor, Servcorp, the share price might start to move in the right direction.
