Slow and steady wins the race

16 novembre 2023

Bird's eye view of a young brunette woman and a senior woman using their devices while sharing a desk.

WeWork’s downfall and IWG’s ascent 

Last week, WeWork, once regarded as the world’s most valuable start up, declared bankruptcy. This decision followed weeks of speculation. WeWork’s mission of being the leading global co-working community came to an end due to its relentless pursuit of growth. Its initial misrepresentation as a tech company and consistent cash burn from unprofitable leases indicated overambition from the start. This development provides an interesting opportunity for one of our holdings.

With WeWork’s restructuring of its extensive 700-plus-location portfolio, IWG (IWG LN) stands to benefit from less competition and an opportunity to expand its own network. For years, WeWork imposed pricing pressures to attract members. Now, this industry-wide pressure should ease, to IWG’s benefit.

IWG, the world’s largest provider of workspace solutions, began its operations in Brussels over 30 years ago. With more than 4,000 locations across 120 countries, its early entry into the market has been advantageous. The company is currently trading at 5.44x EV/EBITDA, a notable multi-year low. It has demonstrated strong pricing power and momentum, with revenues up 14% in the first half of 2023, totaling a record £1.7 billion. The company has focused on revenue growth and free cash flow generation, which has helped strengthen its balance sheet by lowering net debt.

Several years ago, to boost its top line and margins, the company introduced a capital-light business model. This model is particularly interesting due to the lower CAPEX requirements because of sharing agreements with building landlords for office space renovations. IWG partners with landlords for management, operations and member recruitment in return for a management fee. Additionally, the model includes franchise agreements in two forms. The first involves master franchise agreements, where a partner buys out an existing IWG portfolio and commits to additional office roll outs, paying a franchise fee. The second form involves franchised locations in existing markets, where IWG partners with smaller franchise owners to open new centres in markets that IWG already has presence in. This strategy has gained traction, with 582 new centres opened this year compared to 421 in 2022.

For the last couple of years, IWG was affected by its association with WeWork, trading in parallel despite superior financial performance. Though the pandemic took a toll on the coworking sector, IWG continued to generate strong positive free cash flow and EBITDA margins consistent with the company’s historic levels. In contrast, WeWork was aiming to grow revenues, but showed negative EBITDA margins and free cash flow.

Source: Bloomberg.

Around September 2022, IWG’s stock price finally decoupled from WeWork’s as the troubles continued to brew for the latter. Following Q2 2022 results, it became evident that despite growing occupancy at WeWork offices, it continued to offer price cuts to members to contain retention rates unlike IWG that not only grew occupancy but was beginning to raise prices, a trend continuing to date.

In the current market, which still seems to favour some growth stocks with weak financials, we continue to prioritize companies with healthy balance sheets and promising profitable growth prospects.

Gestion d’actifs Global Alpha Ltée
novembre 16th, 2023