IWG revenues rise but cash generation drops, FX headwinds highlighted

Flexible workspace provider IWG, formerly Regus, posted a 6.7% rise in first-quarter group revenues on Wednesday, with good growth in all regions except the UK.

In the three months to the end of March 2018, group revenue at constant currency rose to £583.9m from £580.7m in the same period last year. This was thanks to double-digit growth in EMEA and high single-digit growth in the Americas - driven by the US and Canada - and Asia Pacific. The UK was broadly flat, as expected.

At actual exchange rates, group revenue was up a less impressive 0.6%, reflecting currency headwinds, mostly from the US dollar and some currencies in Asia Pacific.

Revenue from the company's mature offices was up 2.3% at constant currency to £544.1m, but down 3.6% at actual rates. Meanwhile, year-on-year occupancy rates for the quarter were up 0.5 percentage points on a like-for-like basis to 73.5%, reflecting the strong improvement in the occupancy of the 2016 additions.

Underlying cash generation fell £23.7m to £9.5m in what the company said is always a seasonally weaker quarter. It was also hit by additional timing effects around the quarter end date coinciding with Easter, as well as the settlement of some one-off items and non-centre related capital investment.

"Sales activity levels continue to be good and accelerated towards the end of the quarter, which is encouraging. Whilst we have seen the anticipated improvement in constant currency revenue, and believe this will gradually improve throughout the course of the year, the current weakness of some important trading currencies against Sterling is continuing to provide a headwind for the translation of our results.

"Given the significant growth our industry is experiencing we will continue to invest in our national networks to maintain our clear industry leadership. Underlying trading for the year to date has been good and continues to improve. We now anticipate a modest increase in sales and marketing investment in the year to support our strong growth pipeline, alongside our network optimisation activity."

RBC Capital Markets reaffirmed its 'sector perform' rating on IWG after the update.

"We believe IWG has an unrivalled market position, significant expansion potential and strong structural growth drivers. However, with the company continuing to embark on an aggressive expansion plan, and credibility still low, we believe it will be sometime before the market will give the benefit of the doubt and clearly incremental costs today coming so soon after the warning last year are very unhelpful in this regard.

"The current valuation (15x 19 estimate price-to-earnings) is broadly in line with the specialist staffers in the sector, which have historically demonstrated similar levels of operational leverage."

At 1000 BST, the shares were down 2.9% to 237p.