IWG shares are trading -4.3% after the company reported that disappointing UK business performance is forcing it to reassess FY operating profits, which are now expected £15-20m below previous assessments. An unwelcome profits warning!

The company is taking a painful short-term hit to its profitability (and to its share price) as it is investing in the future by increasing CAPEX and growing its network. More office space (est. +45% organic growth in 2018, a 17% increase on prior guidance) means bigger expenditures (+£230m).

With previous expectations that capital investments would be limited to £200m, shareholders are now, in effect, paying for company’s optimism. That said, at least the 17% increase on previous space growth guidance is only increasing costs by 15%, which suggests that the additional investments may be a better value.

Day traders are likely miffed at IWG’s approach, as the share price movements today testify, but long-term shareholders may be hopeful that the company is taking this unpopular step now, when global workspace sales are strong and IWG can sustain this temporary, albeit still painful, hit to the solar plexus.

While UK business conditions are disappointing for IWG (London market hit by persistent Brexit uncertainty), they make up just 18% of the company’s profits and IWG is hoping that other regions can compensate.

IWG still maintains a highly attractive business model, evidenced by a succession of takeover bids for the company (mainly from US private equity and LBO shops), with the latest merger offer from Terra Firma Investments just this Monday.

A new profits warning from the workspace provider is no doubt unpleasant, but could be merely a hiccup for the company that is expecting higher investments to start showing some payoff in H2 2018. Grin and bear it, everyone?

Artjom Hatsaturjants, Research Analyst, 27 June 2018