Office provider IWG shaken as recession fears weigh on recovery

Fears of a recession threaten to slow the recovery of the world’s biggest provider of flexible office space, fuelling investor concerns about the outlook for the sector.

IWG’s share price fell 17 per cent early on Tuesday — before recovering to about 10 per cent down — as the group reported a higher than expected loss and Barclays, its house broker, slashed its expectations for the full year.

The office provider posted a pre-tax loss of £70mn for the first half, compared with a £163mn loss a year earlier.

But the latest loss was larger than Barclays had anticipated and the increased prospects of recession in IWG’s key markets in Europe, the US and Asia was likely to diminish demand for new office space and ultimately hit earnings, warned the bank.

IWG chief executive Mark Dixon pointed to rising occupancy rates and revenues — up almost 25 per cent compared with a year earlier to £1.45bn — as reasons for optimism. But the increase in occupancy rates had slowed in the second quarter of the year and Barclays predicted revenue growth would follow suit.

“We’re obviously not winning the battle with investors yet, but over time we hope to do that,” said Dixon.

One top 10 investor said: “The question now is what is IWG’s plan to get its debt down? If we do have a recession in the next 12, 18, 24 months, how bad could its cash burn be, what pressure could it put on the balance sheet and what levers could IWG pull to offset that.”

On the plus side, the business was more diversified and therefore likely to be more resilient than it was during the financial crisis and the dotcom crash, the investor added.

Another investor said that “despite the optimistic picture management presents, the cash generation for the first half isn’t great.

“Any UK cyclical company that is operationally and financially geared, and has disappointed on earnings, will typically experience a corresponding drop in the share price,” the investor added.

Barclays cut its earnings estimates for IWG to forecast a loss of £20mn for the full year, against consensus estimates of a £73mn profit.

The bank lowered its price target for the company by almost a quarter to 230p.

Dixon said IWG’s business model would weather any recession and could even benefit from it as companies looked to cut costs.

However, the second investor said Dixon was “perennially optimistic” and warned that the “economic cycle is a much greater short-term headwind than any tailwind coming from an increase in hybrid working”.

Andrew Shepherd-Barron, an analyst at Peel Hunt, said Dixon’s capital-light strategy might pay off in the long term. “But in the short term, [IWG] is always vulnerable to these deteriorating economic situations,” he added.

The company’s largest rival, WeWork, has also struggled as the global economy has cooled. Shares in the US-listed company are down 45 per cent in the year to date, trading at $5.

Dixon argued that a recession would push companies to save on costs by signing the kinds of short leases on flexible terms that IWG and WeWork offered, rather than taking on lengthy fixed leases with traditional landlords.

Shepherd-Barron said the steep drop in IWG’s shares was “a strong reaction” given the results. But he warned: “If we go into an unemployment-type recession, don’t tell me people will take more space.”

The investor said IWG’s depressed valuation might push potential buyers to revisit it as a takeover target. “A private equity buyer could come along and put the market out of its misery.”

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