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First Avenue International Fund Comments on IWG Plc

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Holly LaFon
Jun 06, 2017
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IWG plc ("IWG") (IWG) In early January 2017 we began to purchase shares of IWG plc, until recently known as Regus plc. IWG is the world's largest provider of shorter-term office space solutions, sometimes referred to as "workspace as a service:' While the vast majority of the company's offering carries the Regus label, the company is evolving into a more segmented and multi-branded offering, hence the name change. The company's founder, Mark Dixon, pioneered the industry, which has been rapidly growing its utility to corporations and individuals for nearly two decades. IWG is the early mover and has unrivalled scale. Its nearest competitors, including one recently accorded a "unicorn" valuation, are a mere pittance of its size and revenue. IWG also distinguishes itself by being highly profitable. Our entry point into our IWG investment was created by two factors. First, in recent years IWG had undertaken a significant multi-year expansion of its network, which required a considerable level of capital expenditure by the company. The nature of the business is such that new locations take time to mature, reaching occupancy levels needed to produce the intended level of profitability. As a result, recent operating performance exhibits less of the things many analysts tend to care a lot about - current free cash flow, near-term profit growth and returns on invested capital - all of which were depressed, temporarily we suspect, by the wave of investment we described. It is worth noting though that this same lumpy cadence of investment activity is how the company and its founder have produced their tremendous long-term record of business value growth. Second, although its operations are global in scope and North America is its largest geographic focus, IWG is listed in London. In the first few days following the June 2016 Brexit referendum vote, IWG lost nearly 30% of its value in U.S. dollar terms as a result of stock price declines and a steep drop in the British pound, the currency in which it trades. The implicit suggestion was that its entire UK operations were worthless, which is of course nonsense. The stock did not recover as 2016 progressed. In short, our view was that the façade of poor operating profitability was likely to be fleeting with a little time to allow for recently made investments to mature. We also believe that, even on the basis of the status quo, the company had become attractively valued as a result of British pound and stock price declines, particularly so for a very well-financed business.

From Third Avenue International Value Fund first quarter 2017 shareholder letter.

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