Fears of a recession threaten to slow the recovery of the world’s largest provider of flexible office space, raising investor concerns about the sector’s outlook.
IWG’s share price fell 17 percent early Tuesday — before recovering to about 10 percent lower — as the group reported a higher-than-expected loss and Barclays, its real estate broker, cut its full-year forecast.
The office provider announced a pre-tax loss of £70 million for the first half, compared to a loss of £163 million the previous year.
But the latest loss was larger than Barclays had expected, and the bank warned that rising expectations of recession in the IWG’s key markets in Europe, the United States and Asia are likely to reduce demand for new office space and ultimately hurt profits.
IWG Chief Executive Mark Dixon cited rising occupancy rates and revenue – nearly 25 per cent from the previous year to £1.45bn – as reasons for optimism. But the increase in occupancy rates slowed in the second quarter of the year and Barclays expects revenue growth to follow suit.
“Obviously we haven’t won the battle with investors yet, but with time we hope to do so,” Dixon said.
One of the top 10 investors said: “The question now is what is the IWG’s plan to cut its debt? If we have a recession in the next 12, 18, 24 months, how bad is the cash burn, what pressure can it put on the balance sheet and what are the leverages? that the IWG could pull to make up for that.”
On the positive side, the investor added, the business has been more diversified and therefore likely to be more resilient than it was during the financial crisis and the internet crash.
Another investor said that “despite the optimistic picture of management, the liquidity generation for the first half is not good.”
“Any UK cyclical company that is operationally and financially oriented, and disappointed with earnings, will typically see a similar drop in the share price,” the investor added.
Barclays lowered its profit estimate for the IWG to forecast a loss of £20 million for the full year, versus consensus estimates of a profit of £73 million.
The bank cut the company’s target price by nearly a quarter to 230 pence.
Dixon said the IWG’s business model would weather a recession and could benefit from it as companies look to cut costs.
However, the second investor said Dixon was “always optimistic” and cautioned that “the economic cycle is a much bigger short-term headwind than any tailwind that comes from the uptick in hybrid action.”
Andrew Shepherd Barron, an analyst at Bill Hunt, said Dixon’s light strategy may pay off in the long term. But in the short term, [IWG] He is always vulnerable to these deteriorating economic conditions.”
The company’s biggest competitor, WeWorkIt also struggled with the cooling of the global economy. Shares in the publicly listed US company are down 45 percent in the year so far, trading at $5.
Dixon argued that the recession would prompt companies to save costs by signing the kinds of short leases with flexible terms offered by IWG and WeWork, rather than taking long fixed leases with traditional landlords.
Shepard Barron said the sharp drop in IWG shares was a “strong reaction” given the results. But he cautioned: “If we go into an unemployment-type recession, don’t tell me people are going to take up more space.”
The investor said the IWG’s low valuation could prompt potential buyers to reconsider it as a takeover target. “Private equity buyers can come in and get the market out of its misery.”