IWG (International Workspace Group) is fundamentally changing its business model from one that invests and runs property to one that simply manages property. On yesterday’s call, CEO Mark Dixon, explained to us that by 2025 the portfolio will be 80% managed and 20% owned property, as opposed to the current 35%/65% split.
The managed property book is far quicker to scale, so Mark expects the c.3k book to grow 10-fold before saturating the global market.
Not only does this enable the company to expand its global footprint into new geographies, but it de-risks the proposition to flexible lease agreements and ensures steady cash flow through a simple revenue model.
Bull Points
⬆️ Corporate pivot to asset-light property management model.
⬆️ Worka subsidiary will not be sold, but instead IPO’d by IWG itself.
⬆️ Benefits include healthcare (BUPA in the UK), food, gym membership, socials and network access.
⬆️ Upfront fee and simple 16% of revenue model, with 50% margin.
⬆️ Thematic tailwinds of the hybrid working super trend behind it.
⬆️ The buildings the companies does own are highly profitable.
⬆️ All new and renegotiated leases are ‘flexible’.
⬆️ Service revenues (accounting for 22%) are far superior than peers (around 3-4%)
⬆️ Expansion into new territories: Libya, Dijibouti, Botswana and Guinea.
Bear Points
⬇️ The company hasn’t been profitable for some time, hence the market cap reduction.
⬇️ With a 120-nation footprint, many of the jurisdictions carry country risk, including China.
⬇️ IWG needs to focus on its PR and IR division to tell its story.
⬇️ The balance sheet is highly geared but Mark believes it’s perfectly manageable.
Why Do You Care?
We’re always interested in companies with a catalyst and IWG certainly has one. This corporate pivot provides flexibility to the core business and the clients, de-risking the company and offering the opportunity for a rerating.
Cash flows from operations were up 55% from 2021 to 2022 and this trend should continue as the asset-light management holdings increase in number.
As Mark said, “We’re firing on all cylinders in a tough economy”.
Thematic Insight
The thematic tailwinds are undeniable. Decentralised Living is a theme we’ve been tracking for some time and in a post-Covid world, it seems hybrid working is here to stay.
As Mark explained on the call, the migration to suburban and rural areas continues as swathes of society take the opportunity to live the hybrid working life that technology allows.
Interestingly, we learnt that the portfolio is 25% in central business districts (CBDs) and 75% suburban and rural. The flight from the former continues and the portfolio is well positioned to continue to benefit from this trend.
CALL SUMMARY
Managing not Investing The new focus is on managing buildings that other companies own, IWG will make no further property investments. The company comes in, operates the workspace, puts systems in place, provides services and enables issues benefits for the companies and employees to benefit from.
In return IWG takes an up-front fee and then 16% of that corporations revenue, which it makes a 50% margin on. This turnkey solution is hugely beneficial to companies that don’t want the headache of the usual corporate overheads, the price seems fair, but for highly scalable and successful businesses, provides massive upside to IWG.
We also learnt that the company’s property portfolio is valued at $250mn versus debt against it of $680mn. The company never writes up or down the properties on the balance sheet, so no unrealised profits or losses are recorded, they are simply carried at cost. However, these assets are in fact slowly increasing in value, as real estate tends to, and as such a monetisation event would result in a (marginal) bottom line profit boost.
Balance Sheet There is a real focus on debt reduction, with the company paying back $611mn in debt in 2022.
Mark believes that the risk profile plummets due to the new management structure, so some US investors actually want the company to take on more debt but understands doing so looks risky on the face of it so is reluctant to in order to encourage equity buyers in the open market.
Perks The company offers its clients free healthcare (BUPA in the UK) as well as healthy food, free gym membership, social and entertainment events, the optionality of use of other IWG sites, access to the network and will soon launch a points rewards scheme.
In the case of BUPA for example, they offer the lowest package which BUPA then upsells to, making it a win-win for both companies.
China Mark first took the business to China 32 years ago.
Since then, the company has consistently made at least $0.5mn a year there and Mark explained for the first 15 years it was brilliant. However, the last 15 years has been tough because of market saturation and the supply of new building space driving costs down.
3% of the business is in China, a reasonable figure. The asset light pivot should continue to serve them well here, so expansion is coming but Mark said getting funds out can be expensive.
Japan IWG recently sold its entire Japanese business to Mitsibushi because they really understand the true value of the growth potential.
Clients On its roster, IWG boasts some big-name clients including Google.
It’s the service revenues like providing in-house food that boosts the bottom line and accounts for 22% of revenues over all, compared with just 3-4% that comparative companies manage.
Summary
Mark believes that the only comparable company to IWG is Marriot International which now manages 97% of its hotel portfolio and owns just 3%.
Marriott trades on 21x earnings. For IWG to double, a similar multiple would put the earnings on c.$150mn, something that we see as very plausible in the coming years given the corporate pivot and scalability of the managed property book.
When asked about the companies PR and IR failings, Mark held his hands up, acknowledging his focus has been the business. For the shares to move, that’s the next job.
As Mark said, “I couldn’t leave with the shares at this level – I need to see this stock rerated to the valuation it deserves and I’m focussed on delivering it”.
Some could argue that water is the most undervalued commodity on the planet. Historically, it’s been heavily subsidised by governments, allowing corporates to produce products cheaper and not pass the real cost of water onto consumers.
But with inflationary pressures, drought, a cost-of-living crisis, and the many of the world’s nations with debt issues, the upward pressure on water pricing mounts.
Furthermore, as the ESG revolution evolves, companies are being judged more and more on their environmental impact. What started as a focus on CO2 emissions and the carbon footprint is expanding to a wide array of factors. One of these, of course, is water. How much water does a company use? Is it sustainable? This culminated in the Institutional Shareholder Service (ISS) launching the ESG Water Risk Rating on World Water Day earlier in the year.
As a result, corporates are judged on their impact on the water cycle, as investors choose more and more to support companies that focus on the environment and the bottom line. Meanwhile, regulatory bodies such as Ofwat have implemented a 16% leak reduction target by 2025.
In summary, all these thematic tailwinds lead us to companies such as Water Intelligence, who can help companies, utilities, municipalities and homeowners detect, fix and monitor leaks – and in the case of corporates – feed this information back to shareholders to improve their ESG scores.
Salesforce
American Leak Detection (ALD) is a 30-year old brand with franchises in 46 US states, spanning hundreds of millions of homes. No plumber working for themselves could afford a Salesforce contract. But by paying for Salesforce at the parent level and distributing it to the franchises, Water Intelligence is adding two new revenue streams for itself through its franchise royalties.
With every visit that a trained ALD technician or plumber makes, they up-sell water monitoring equipment to the homes, corporates, and factories they visit. And if a sale is made, the franchisee takes a cut of the item sold, as well as the installation fee.
This boosts the revenue of the franchisee, which in turn makes its way back to the parent company via the royalty – far outstripping the company-wide Salesforce cost.
Franchising
As Patrick explained, the Water Intelligence family is close, he knows the franchise owners well and is looking forward to the upcoming annual franchise event in Nashville.
At the event, he is aware of those franchise owners looking to retire, or partially retire. At which time, he often offers to buy the franchise back in an accretive deal that’s beneficial to the parent company (bringing assets back onto the balance sheet, strengthening the financial position and reducing the WACC) and giving the franchise owner the exit they seek. Sometimes offering them a position at the corporate level, or with share options, to ensure that the business is incentivised from top to bottom to add value to the equity.
Financial Position
Following a recent funding round with Blackrock and Canaccord, the company appears well capitalised, with monthly recurring revenues from the franchises and no bad debt. The WACC is low and the balance sheet strong – cash of $20mn with debt of $17mn and distributed to 2027.
Summary
Water intelligence is a tech business at heart. Sound and infrared technologies are used to pinpoint the leaks, which are then monitored through the company’s operating system.
DeSouza continues to build the Water Intelligence empire, for example, with the IntelliDitch brand, which transports water vast distances through its proprietary lining system.
But 90% of the companies’ revenues are from the well-established American Leak Detection brand in the US. And although DeSouza recently bought two plumbing companies to vertically integrate the parent, it’s the ‘Water Intelligence’ brand that exhibits serious growth potential here.
As an investment, Water Intelligence offers a growing cash flow steady business in ALD, with inflationary tailwinds, and the ESG catalyst, which could see the share price find new levels through Wat-er-Save corporate water monitoring contracts.
Remarkably, Water Intelligence has compounded top and bottom-line growth above 30% over the past four years, and with the macroeconomic conditions as they are, and the thematic tailwinds in place, I wouldn’t bet against it continuing this trend.
A Large Discount According to CEO, Gerard Barron, if this were a land-based resource, and therefore trading on a land-based mining multiple, the share price would be $23 (as opposed to c.$1).
He believes the discount The Metals Company (TMC) is trading on is by no means reflective of the risks that sea-based mining, as an investment, present.
Demand The bulk of these polymetallic nodules are sat on the seabed of the Clarion-Clipperton Zone, 75,000sqm in size and 4,300m below sea level, between Mexico and Hawaii. They contain manganese – manganese alloys are used in the production of steel – as well as nickel, copper and cobalt – used in the now heavily demand driven EV and green transition.
Metal demand is outstripping supply as authorities continue to block land-based mines for environmental factors. (For example, the Pebble Mine, in Alaska).
Environmental The International Seabed Authority (ISA) issued around 20 licenses, most of which went to sovereign nations, including China, which was granted two. TMC, however, won three, two of which now have a measured and indicated resource – 1.6bn tonnes of resource. (The market cap is less than $300mn, and the NPV of the resource close to $14bn).
With local corporate sponsors and 250 people at sea in an operating production vessel, Gerard says: “I want the world to see exactly what we’re doing, because it’s so light touch compared to land based alternatives.”
This is why TMC is working on its cloud-based AI and tech solution. Proving to the world that mining the seabed can take place with minimal destruction, whilst keeping oxygen and noise levels within respectable and defined limits, is of paramount importance to appease environmentalists.
Operational Strategy The company has raised c.$400mn to date (half of which before listing) and plans to stay asset light, or fund future capex requirements via offtake agreements with its operating partners.
Project Zero, a pilot operation due to start in 2024, is funded in this manner, alongside the Swiss company Allseas which collects the nodules and will be paid EUR 150/wet tonne of nodules in year one (and less 20% thereafter) in excess above the capital outlay and operating expenses. It’s believed EUR 100mn is all that’s required to bring this pilot scheme into operation, which would be upgraded into a full commercial production facility if successful.
Summary There is no doubt that an investment in TMC is high-risk. Seabed polymetallic nodule collection is a new industry and requires the design and construction of particular vehicles and systems. The collectors on the seabed, the tethered pipes which push the nodules to the surface. But the technologies to harvest the nodules are well established. It’s really a case of getting them to land.
And in that sense, if and when a private company (TMC or Lockheed Martin) or sovereign nation manages it, at scale, TMC’s share price could go to multiples of where it is now.
Pure-play polymetallic nodule seabed extraction with a share price waiting for proof of concept and a pilot scheme around the corner.
We were honoured to be joined by Jonathan Webb, CEO and founder of AppHarvest, one of the world’s largest controlled environment agriculture facilities.
As an investment opportunity, the company touches on many of our key themes, including climate change, food security, water shortage and supply chain disruption. With 50% more food required but 70% of water already in use, it’s estimated we’ll need two Planet Earths worth of arable land to feed everyone in 2050.
It’s for this reason Jonathan is convinced indoor farming is the solution, and why he’s built a closed-loop facility that converts rainwater, collected on a roof the size of 58 football fields, into produce, which itself is up to 95% water.
Currently the US imports 60% of its tomatoes, some of which come from farms that Mexican cartels use to launder money and others which exploit child labour. Furthermore, these imports take up to two weeks to reach the shelves, compared to Jonathan’s tomatoes which arrive in just one day.
