Description

Investment Summary: IWG is the largest owner of coworking space in the world, with their two major brands being Regus and Spaces. While IWG trades in the UK, 50%+ of its business is based in North America. We believe IWG could more than double in the next 2 years and generate a 35-40% 5 year IRR from today’s prices, leading to roughly a 5x in 5 years.  IWG provided long term guidance to double EBITDA by 2028, which will drive greater than 20% FCF/share growth given decreasing capex, lower interest expense, and WC tailwinds. Given IWG’s transition from capital intensive to asset light, we think the multiple in the shares can transition from 5.5x EBITDA to 10x EBITDA or greater. IWG’s cash flow conversion and earnings stream in 2028 will look much more similar to HLT, MAR, H, and IHG, which trade at 15-17x NTM EBITDA. Given more than a doubling in FCF and more than a doubling in the multiple, we believe there is very significant upside in IWG. Other near term catalysts include a transition to US GAAP, which will help investors see the true financials on Bloomberg, Factset, and Capiq. Additionally, the company intends to relist in the US in the next 24 months. Lastly, IWG is by far the best potential acquirer for WeWork, and we believe there is a 50/50 shot of a deal getting done. The accretion could be massive, with IWG extracting hundreds of millions of dollars of corporate overhead synergies, allowing it to pay a full multiple on WeWork’s reported EBITDA, but a much lower multiple on synergized EBITDA. For illustrative purposes, we assume IWG pays approximately $1 billion for $300-500m of synergized EBITDA. We believe the combined entity would trade at 7-8x, meaning they would create $1-3 billion of equity value in the transaction alone not including the likely multiple expansion that would accompany such a transformative deal. Accordingly, we believe IWG stock could be up 50-100% if they can get this deal done, and our numbers and 5 year IRR would go up significantly in this event. Should they end up not acquiring WeWork, capital returns should accelerate meaningfully in 2025, once IWG reaches its target leverage of 1x net leverage.

IWG is benefitting from several secular trends today and we believe it is at an inflection point in both its profitability and its valuation. All indications suggest that there is a major multi-year secular trend to hybrid working which has been accelerated by the pandemic, and is in the very early innings of its growth path. As the industry leader, IWG is well positioned to benefit. A key to the IWG investment thesis is the ongoing shift in its business model from capital intensive traditional company owned locations to a capital-light managed & franchise location model. Under this new model. IWG partners with property owners, who provide the capital to transform their locations to co-working environments, with IWG providing the know-how and managing the operations. IWG’s managed & franchise model has many similarities to the business model of some of the leading hotel/hospitality management companies. As IWG’s cap-light signings continue to grow and begin to enhance profitability and FCF generation beginning later this year, transitioning the business model to more of an asset-light structure, not only should FCF accelerate, we believe the multiple will re-rate higher closer to hospitality management peers such as MAR and HLT. IWG has articulated ambitious financial targets to increase EBITDA to $1 billion and grow FCF at a 30%+ CAGR in the coming years. Using a SOTP and FCF analysis, if management achieves its FY28 long-term financial targets and using appropriate comps, the share price could rise from below $2/share to roughly $10/share. While we are always skeptical of long-term guidance and think it is potentially aggressive, it is not out of the question, and even if they come close to this goal, it will be rewarding for shareholders.

The Clear Market Leader In A Highly Fragmented Growth Market: From a scale of size perspective, IWG is far and away the market leader in a highly fragmented market with 3,514 locations in 120 countries vs an estimated ~330 for WeWork post-restructuring, more than 3x the next ten competitors combined and is the only global platform.

IWG has locations in central business districts and suburban locations, with the latter being a key focus area as people seek to work closer to home. The company views hybrid working as a structural growth market, with independent studies suggesting adoption of 30%+ of the ~1.2bn white collar workers over the long term. As illustrated below management believes the market TAM is ~$2tn, which suggests a long multi-year growth runway. 

All indications suggest that there is a major muiti-year secular trend to hybrid working which has been accelerated by the pandemic and is in the very early innings of its growth path. The major headwind to hybrid adoption is the time required for corporates to exit traditional leases. Various studies suggest hybrid working has benefits for all stakeholders. Employees are able to work closer to home, reducing costs and commute times. Studies have shown that hybrid workers are both happier and more productive. Companies can save 50%+ on property costs and lower personnel costs and increase employee retention.  

IWG has a blue-chip customer base of large mulit-nationals and leading regional/national companies, which as illustrated below includes ~83% of the Fortune 500. These well known brands not only provide IWG with an impressive customer resume for new client signings, but also should provide the company additional growth opportunities to benefit from their transition to a hybrid co-working model and cross sell opportunities. Additionally, through its diverse co-working brand portfolio, the company has offerings that appeal to small & medium business, start-ups and freelancers.

IWG addresses coworking market with a multi-brand offering targeted at different customer requirements and price points, with Regus, Signature and Spaces being the largest. In order to highlight the different business models, the company has recently begun to break out (and will shortly do so in U.S. dollar GAAP) its operations among three business units: managed & franchised, company owned & Worka. IWG’s strategy has in recently been focused on rapidly growing its capital light managed & franchise business and expanding its consulting focused Worka business. Conversely, the company’s traditional company owned operations are a significant cash contributor and currently provide ~70% of corporate profitability. However, growth in this business has been de-emphasized due to the shift to managed & franchised operations.

In March 2022 IWG acquired The Instant Group. By combining IWG’s digital assets (EasyOffices.com, Meeting.com, Rova & Worka), the goal is to create the world’s largest independent marketplace for flexible workspace. This enlarged marketplace will provide data and market choice that will enable work from anywhere plans for multi-national companies through to sole employee start-ups. The merger consolidated more than 25,000 workspaces and offers a range of services to clients including membership plans, on demand, virtual offices, office booking, managed offices, and consulting capability.

IWG Is Benefiting From 3 Major Industry Secular Trends: Firstly, as illustrated below, the shift from traditional office work in downtown areas to using more satellite offices in the suburbs is a huge benefit to them. 

With 3,500 locations globally, IWG has a very strong footprint in suburbs and smaller towns which are benefitting from people’s desire to avoid commuting. Secondly, the widely reported struggles of commercial real estate landlords benefit IWG’s new business model of franchising out their brands. This is part of their cap-light or managed location growth, where the landlord provides all the capital, and IWG provides the intellectual know-how and branding to help a landlord transition their traditional office space to an IWG branded coworking space. 

While it is still early on in this business model, IWG is signing up ~200+ locations per quarter, with several customers signing up multiple locations. There is roughly a 2-year lag between locations already signed up and generating FCF for IWG. We believe the benefit of the ~1,200 locations they have already signed up will begin to flow through in 2024, but really start to contribute meaningfully in 2025. 

As their traditionally capex-heavy and working-capital heavy business model shifts to capex-light and working capital-light, we think the multiple will rerate higher. We believe IWG’s managed & franchised business is very similar to MAR and HLT which trade at over 15x EBITDA. Thirdly, the WeWork bankruptcy is a big positive for IWG. While IWG is the #1 player in the space, WeWork was #2, and the bankruptcy of WeWork will allow for more rational pricing and for IWG to pick up some WeWork locations. Additionally, there is the potential for IWG to acquire Wework, which would be highly accretive.

There Are Significant Differences Between IWG & WeWork: A few notes on the differences between IWG and WeWork and why the WeWork bankruptcy does not concern us as it relates to IWG’s business model. Pre-bankruptcy, WeWork ran a pure company-owned capital-intensive business model. 

Most importantly, IWG runs its locations as separate entities (in SPVs) that can be individually shut down (essentially bankrupted) without affecting the parent company. While WeWork had to make each location work because they were not bankruptcy remote, IWG has a completely different legal structure where they can bankrupt individual locations without affecting the parent company. In addition, IWG has more flexible lease terms with their landlords that require a renegotiation of IWG’s rent if the rents of its coworking tenants are changing. So IWG has more flexibility both at the corporate and the individual location levels, and this flexibility allows them to adapt to the underlying changes in real estate prices that will inevitably happen across the 3,500 locations they have globally. 

Another significant difference between the two companies dates back to their founding, their corporate cultures and their financial goals. WeWork was founded in 2010 and VC backed to grow as fast as possible, with profitability an afterthought to be figured out down the road. Conversely, IWG was founded by owner/operator Mark Dixon (who currently owns ~25% of the shares) in 1989, with a focus on profitable growth. IWG has run profitably for the last 23 years (including during the 08/09 financial crisis and thru COVID), earning a mid-high 20’s EBITDA margin, while WeWork never made a profit. 

While IWG & WeWork are in the same industry, they have different corporate cultures and are two very different businesses.

IWG Has A Track Record Of Growth & Consistent Profitability Thru Various Economic Cycles: Throughout IWG’s 23 year history the company has compiled a track record of pretty consistent growth in adding new locations and growing system-wide sales and overall revenues thru various economic cycles. Using the strong FCF from the business, the company has been successful in growing locations organically and with the addition of new brands focused on different customer needs. Noteworthy, after a period of rapid growth in locations thru the 2018-19 period, with the shift to emphasize a managed & franchised model, IWG has slowed acquiring company owned locations in favor of expansion via its managed & franchised business.

IWG has demonstrated a pretty consistent track record of revenue growth, with the only period of modest declines registered during the Great Financial Crisis and the COVID-19 pandemic. Organic revenue growth has averaged about 9% over the last 15 years.

Note: Historical data in blue, COVID periods in gray, and Cap-iq consensus estimates in orange.

Likewise, adjusted EBITDA dollars and margins have increased over the last decade leading up to the pandemic. However, while margins have rebounded significantly from pandemic lows, they are slightly below pre-pandemic levels due to changes in the revenue mix post the 2022 acquisition of The Instant Group (which combined with IWG’s digital assets formed its Worka division). 

Note: Historical data in blue, COVID periods in gray, and Cap-iq consensus estimates in orange.

Note: Historical data in blue, COVID periods in gray, and Cap-iq consensus estimates in orange.

Shifting To A Managed & Franchise Model Is Beneficial To Cash Flow: As stated previously, in the last couple of years IWG has been proactively shifting its coworking business model from a capital intensive company owned model, where it owns the real estate, to a capital-light model, where it partners with landlords. The landlord provides all the capital, and IWG provides the intellectual know-how and branding to help a landlord transition their traditional office space to an IWG branded coworking space. Going forward, IWG will de-emphasize adding new company-owned locations and focus on growing its managed & franchise portfolio, with a goal for ~200+ new signings per quarter, as well as expanding its Worka business.

A major benefit of this transition is that IWG will significantly decrease its cap-ex investments, which will translate into a significant increase in its EBITDA to free cash flow ratio. As illustrated in the below charts, the declining trend in growth cap-ex is already evident and will continue to decline further in the future. Maintenance cap-ex will continue at roughly $100 million per year.

Note: Historical data in blue and Cap-iq consensus estimates in orange.

Management has stated that the primary use of the increase in free cash flow will be reducing the company’s leverage, with a target net debt/EBITDA ratio of 1x. Thereafter share repurchases are possible in future years.

IWG Has Ambitious FCF Growth Targets; If They Just Come Close, It Would Be Rewarding To Shareholders: IWG has articulated ambitious financial targets to achieve a $1bn run-rate in adj. EBITDA (vs. c.$495m in FY23E) and grow FCF at a 20%+ CAGR in the coming years. While we are always skeptical of long term guidance and think it is potentially aggressive, it is not out of the question, and even if they come close to this goal, it will be rewarding for shareholders. IWG has several things going for it near-term, including the fact that as the cap-light locations start to ramp up, landlords will pay IWG a royalty from their locations that will flow through at 70%+ incremental margins. IWG plans to open ~1,000 new cap-light locations per year, which should lead to ~$100m of fee income at maturity roughly 2 years later, which should flow through to roughly $70m of annualized pre-tax free cash flow. 

With $168m of FCF projected for 2024, IWG should grow FCF at 25%+ just from the growth in their managed business. For cap-light locations, from signing to opening takes 10 months, and from opening to revenue maturity is 12-18 months. So, it is roughly a 22-28 month lag from signing to full revenue maturity. IWG thinks they can get to $500m of FCF by 2028. Additionally, IWG’s core traditional cash cow business has been significantly underearning, and while we do not need it for the stock to work, we think margins should rebound from approximately 21% in H1 to 24%-25% over the next few years. Our numbers are supported by the most recent quarter, where they did 23% in the traditional business. As the business recovers from COVID, we believe this margin will continue to trend up. Additionally, capex and working capital needs will decline as future growth is financed by the landlords they are partnering with.

Significant Upside Potential Due To Growth Potential & Rerating: IWG is currently valued at ~5.5x 2024 EV/EBITDA or ~12x 2024 FCF for a business with a 5-year EBTIDA CAGR of ~12% and which has guided FCF/share to grow at a 25%+ clip in the coming years. 

We think the best way to value the company is on a SOTP basis on future EBITDA profitability. Assuming management achieves its $1 billion FY28 EBITDA target, we believe IWG’s Company-Owned business will generate EBITDA of roughly $715 million, Managed & franchised ~$340 million and Worka ~$230 million, with corporate overhead expenses of ~$280 million. Applying multiples of 15.0x/7.0x/12.5x for these business respectively, and deducting corporate overhead expenses at the same 7.0x valuation, adds up to an EV of ~11 billion. Assuming the company is successful in reducing its leverage ratio to its 1.0x target, this translates into an equity value of ~$10 billion, or roughly $10/share. 

Looking at the target price a different way, IWG thinks they can get to ~$500m of FCF by 2028, at 20x FCF that would translate into a $10 billion company, which in either case would be a low-mid 30’s IRR from today. While our analysis assumes management achieves its $1 billion EBITDA target, given the significant upside potential, it is clear that management would only need to come close to reaching its target to make the investment very attractive over the next couple of years.

Two Near-Term Potential Catalysts: GAAP Accounting & A US Stock Listing: Two other potential catalysts to point out. First, in addition to simplifying the financial presentation into the three divisions discussed to provide more transparency and a better understand of each business, IWG has committed to transiting to US GAAP accounting by the end of FY24. Second, consistent with moving to GAAP accounting, it is highly likely that this will be followed by a US share listing. Combined, these two things should make the shares more attractive to US investors (while it trades in the UK, 50%+ of its business is based in North America). Additionally, we believe that when the benefit of the company’s managed & franchised business signings begin to meaningfully flow into IWG’s income statement, this could be an inflection point in investor psychology and lead to a further upward re-rating.   

Recent Sell-Off Is A Buying Opportunity: This week, investors are getting a discount in IWG because the CEO just sold 35 million shares, or 12% of his stake. While not ideal, the transaction is understandable. Mark Dixon had pledged his shares for a margin loan, and after much shareholder questioning, decided to sell stock instead to fund his lifestyle and repay the margin loan. Mark is very wealthy (his IWG stake alone is worth over $500 million USD), and does not take a significant salary, so we view the share sale as reasonable. We think the selloff driven by his sale will blow over when IWG reports a strong Q2.

His share sale comes after two large holders were forced to sell ~60m+ shares in the past year due to redemptions. While these sales have had the desirable effect of increasing float and liquidity, they have no doubt pressured the stock. We believe most of the forced selling is now behind us.

Catalyst

We believe there are a number of catalysts, including:

-- Adopting GAAP accounting,

-- A US stock listing,

-- A potential acquisition of WeWork,

-- Continued growth in new managed & franchise signings,

-- Margin & FCF expansion tied to the shift to an asset-light business model.