Shares in IWG (LSE: IWG), previously known as Regus, started the week with a slump. The office space provider ended Monday 10% down at 330p. At one point, the IWG share price had fallen almost 18%.
It’s all down to the day’s trading update, which addressed “the prolonged impact of the COVID-19 pandemic in some of the Group’s markets.”
In markets where pandemic restrictions are being eased, occupancy is improving. And there’s “an increasing pipeline of corporate customers on network-wide deals.” But continued lockdown in some markets, coupled with the emergence of new virus strains, looks like hurting the bottom line in 2021. And that’s what led to the sell off and the IWG share price slide.
Bad news for 2021 results
Overall occupancy recovery has been lower than IWG had expected. The company said: “Accordingly, this will delay the anticipated recovery in our business and, given the operational gearing of the Group, is expected to have a significant impact on the Group’s results for 2021, with underlying Group EBITDA for 2021 now expected to be well below the level in 2020.”
Considering the restrained speak that companies tend to use in announcements like this, I wonder just how bad “well below” might turn out to be. There’s another thing that concerns me about this latest update too, and which I suspect must have made the IWG share price reaction even worse. It’s the change in sentiment from IWG’s previous trading update.
As recently as 27 April, IWG said: “Q1 2021 provides a clear inflection point, with occupancy stabilising in February and improving in March. We expect this momentum to continue throughout Q2.” Still, the past couple of months could have gone either way. And I can easily forgive a bit too much optimism at Q1 time. But with hindsight, it seems a little more caution was warranted.
IWG share price valuation
Is the IWG share price low enough to make me want to buy? It’s difficult to value the shares right now. IWG reported a statutory pre-tax loss of £620m in 2020, following a profit of £55m in 2019. Against that, the company claimed a positive adjusted EBITDA figure of £134m. That’s pre-IFRS 16, which is complicated by lease liabilities — and those can look misleading for a company in the office leasing business.
But it means I can’t make much sense of where 2021 might go. I just know it should come in well below 2020.
In situations like this, I turn to the balance sheet. And that looks mixed. Reported net debt (excluding those lease liabilities) stood at £351m. To put that into perspective, IWG put its year-end net debt to EBITDA multiple at 2.7 times. And that’s a good bit higher than the 1.5 to 2 times levels I’m more comfortable with. On the upside, that’s based on a bad year for earnings. But on the downside, we’re in for an even worse one this year.
IWG reported liquidity headroom of £802m at 31 December 2020. But that has to last not just this year, but presumably until we see a return to actual (rather than adjusted) cash profits coming in again. That uncertainty is too much for me and I’ll wait at least until first-half results in August. Until then, I expect some IWG share price volatility.