International Workplace Group plc ($IWG)
Some thoughts.
It’s great when you come across a business on which the biggest bulls have done hundreds (thousands?) of hours of collective research on — particularly when 1) those bulls happen to be clever (yes, I consider myself a decent judge of that), 2) the stock has not gone up appreciably during their holding periods and 3) the pillars of their original thesis largely hold up (directionally).
I’m mainly writing this to myself to look back on and organize my thoughts…and because I like writing. If you are reading this, maybe you’ll find it intriguing enough to go kick the tires yourself.
What is it?
IWG leases and manages a large network of flexible workspaces (think: WeWork). Historically, it took the standard approach of methodically buying “centers” and then earning revenue by filling these spaces with users.
For the past few years, IWG has been executing a “capital light” managed location/franchising strategy. Instead of directly leasing buildings, it has been partnering with building owners to convert their buildings into co-working spaces. The owner bears the capital costs, while IWG manages the space and drives usage in exchange for a management fee — IWG has stated that it takes an average of 10 months to open a managed location after it is formally signed up, and then another 18 months for it to reach mature earnings.
Why am I investing?
The basic investment case is that not only has the legacy owned and operated segment of IWG’s business recovered to its pre-Covid earnings, IWG now has a fast-growing franchise segment of which the initial cohorts are starting to come online and reach maturity.
If we do very conservative math on the legacy business, we reach a valuation that implies fairly decent upside from where the stock currently trades. If you add on the managed/franchised business, you end up with very high upside in 5x+ range. I’ll say a variation of the cliche (forgive me): this appears to be a “heads I win a lot, tails I win a decent amount.”
Why is this so undervalued?
Among other things, I listened through several years’ worth of investor calls of IWG, in order, starting with 2020, along with reading the corresponding reports/releases and investor presentations. Here are some observations:
The CEO and management team haven’t done a great job explaining the business and setting expectations with investors. Probably not intentional, but they have consistently overpromised and underdelivered, so I can understand why people will continue to discount management until the numbers hit the bottom line. One example is that the software business was repeatedly touted as something that will grow 10%+ per year, slated for a future IPO, etc. Since these projections were given, the software business has gone flat. The CEO and management said it was due to development hiccups and basically stopped talking about it. When you listen to some of the earlier calls without any context, it felt like the CEO was telling you that the company happens to own a Stamps.com flyer. Another example is that some of the early projections for the managed/franchise pipeline uptake and timing were pie-in-the-sky before coming down to the current more reasonable (TBD) projections. Yet another was IWG floating the idea of a US-listing over the years without any actual plan or timing for said listing.
The financials are hard to understand. I’m saying this as someone who has lived and died by Carvana and its supposedly opaque financials. IWG’s financials are hard to understand because of a combination of 1) IFRS’s annoying (and in this company’s case, largely inapplicable) treatment of leases and 2) management trying to develop a useful way to present IWG’s new business segment on the fly. The way IWG has presented its financials has not been consistent over the last few years, so it is difficult to easily see trends from one report or presentation to the next, or to understand which key metrics need to be focused on. I spent a lot of time trying to reconcile various metrics in order to model something out that made sense and was accurate. I assume this makes the stock less appealing or accessible to more investors.
Catalysts
So the stock has been dead money for many years. The business has been executing directionally (as mentioned previously, the company has overpromised and underdelivered, but if you take their under delivery and discount it even further in your own numbers, you still get something very good in terms of implied IRR). What’s different now? Well, they just started reporting in USD and have committed to going GAAP this year. That alone, I think, will substantially improve the visibility of the business for the broader market. On top of that, the managed cohorts are starting to come online and hit the FCF numbers — by the end of 2026, we’ll finally have some clean segment-level P&L that the market can start modeling out period over period. IWG also recently started paying a dividend and announced a buyback. Although all of these things together should help push stock performance over the next year or two, I think the ultimate rerate, if it is to come, will only happen if IWG lists in the US. The optimist in me hopes that management understands this obvious reality and is making plans for a US listing in due course, but in the meantime I feel comfortable holding this stock for a while while the business continues to perform.
Some Links for Further Viewing:
Disclaimer: I’m long this stock. This is not investing advice.
Thanks for the post. I dont know what changed at IWG ( new CFO impact ?) but the strategy is better communicated, not overpromised and the change to US GAAP is progressing. In all, a great progress re:management. I agree that WORKA/online marketplace still an eyesore, hoping they will react before someone steal their lunch ( "the airbnb of offices" is a startup flytrap and someone could actually succeed).