RBC Capital downgrades IWG 'sector perform'

RBC Capital Markets downgraded flexible workspace provider IWG to ‘sector perform’ from ‘outperform’ and cut the price target to 220p from 370p after its profit warning last month.

The bank said it continues to believe in the growth drivers of the flexible workspace market and that IWG is very well positioned to take advantage. However, the recent warning raises several questions and with the company continuing to embark on an aggressive expansion plan, it will be a while before the market gives the company the benefit of the doubt.

RBC said that the timing of the warning - not long after an upbeat analyst day - and the scale of the downgrade raise questions about management control and systems.

“Even if we give the benefit of the doubt and believe the bulk of the hit reflects tougher market conditions than expected (and associated negative operational leverage), there is no guarantee of any short-term rebound, especially with competition seemingly now stronger and arguably irrational. This contrasts sharply with continued aggressive investment (evidenced by £40m higher capex in 2017 than originally forecast).

“Given the CEO's share sale earlier this year, ahead of an investment led downgrade at H1s, along with a history of jam tomorrow, we believe the market will want to see a sustained period of in-line trading and for credibility to build back before buying into the stock again.”

RBC said that while there is strong growth potential in the market, the reality is that between 2015 and 2017 there was no growth in EBIT and debt increased by around£120m. The bank cut its 2017 EBIT forecast to £161.9m, in line with guidance of £160-170m EBIT. For 2018, it has taken a cautious view and forecast EBIT of £190.2m, which is below consensus estimates of £200m.

At 1020 GMT, the shares were down 0.9% to 219.90p.