Challenging start to 2018 dents annual profits at IWG

Serviced office firm IWG saw profits fall in 2018, after a 'tough' start to the year, and said it would close more UK sites in the current year.

Group revenues rose 7.8%, or 9.7% at constant currency, to £2.54bn. But operating profits fell 6% to £154.1m while pre-tax profits were off 7% at £138.7m.

Overheads increased 10% at constancy currency, from £237.6m to £253.7m.

The Americas, IWG’s biggest market, saw revenues increase 6.6% to £961.7m, but they fell 3.5% in the UK, to £376.5m.

Chairman Douglas Sutherland said: “Our business in the UK has faced challenges in recent times. We took corrective actions to address these challenges which negatively affected our financial performance during 2018.

“We are focused on completing the revitalising of our UK operations through further selective closures, refurbishing sites where we wish to remain and investing more in customer service. Although this will continue to have a short-term financial impact, these are the right actions to stimulate long-term profit growth in the UK.”

The company, formerly known as Regus, added 299 new locations in 2018, meaning IWG is now in 3,306 locations worldwide, a 6% increase on December 2017. The company said there had been particularly strong growth in its large co-working format, Spaces, with 103 new locations opening during the year, taking the total to 182.

Chief executive Mark Dixon said: “2018 was in many ways a year of significant change and consistent improvement. Responding to a tough start to the year, the actions we took during 2018 ensured our performance improved continuously as the months passed.

“This was a year of responding positively to challenging conditions. I am particularly pleased with the way in which the business successfully addressed some powerful economic headwinds in many countries with IWG operates.”

IFRS GUIDANCE

Management explained that new IFRS 16 accounting rules would have no impact to cashflow, but £6.2bn of leases would be moved onto the balance sheet and the new frontloading of costs and the average 3.5-year lease portfolio would results in an exaggerated impact on earnings per share.

Basic EPS of 11.7p would be 7p, or 40% lower under IFRS16.

"This is clearly unhelpful and likely to be confusing, despite having no impact on the economics of the business," said analysts at RBC Capital Markets. "As such, we believe the market will continue to value the business on cash – with the caveat that a/ it is cyclical and b/ IWG is likely to carry on expanding aggressively through the capex line."

Peel Hunt said that while fundamental cash flow is not affected, "when you move net debt/EBITDA from 1.2x to 4.8x and reduce EPS by 40% for an accounting charge, investors cannot simply ignore it".

"Even though the size of the change is broadly in line with expectations, coupled with an underlying PBT downgrade today, we see the shares as unlikely to perform."

Shares in IWG started lower on Wednesday but ended marginally higher at 232.29p.