Regus is an easy business to understand but a difficult one to replicate. Some have tried and there are other companies offering offices to rent on a short-term or flexible basis, but Regus remains the market leader, having opened its first centre in Brussels in 1989.
It placed a large bet 18 months ago that that market would continue to expand. Some were worried at the time that this expansion was too swift, so Regus decided to release more detailed data that revealed how long new outlets, which are inevitably loss-making, take to mature and become profitable. Typically, it takes four years for these to reach their full potential, although the company increasingly is entering into partnerships that require some profit-sharing but reduce its investment and make that payback quicker.
Regus focuses on three metrics. Its mature properties, built before 2012, delivered a return on investment of 23.1 per cent last year, up from 20.9 per cent the previous year. Their gross margins were up from 27.8 per cent to 28.3 per cent, about as good as it gets. Meanwhile, outlets built before 2015 also progressed, with margins ahead from 23.3 per cent to 24.6 per cent. The third metric is the cost base. As a percentage of revenues, overheads fell by two percentage points, which indicates they are well under control.
In 2015, as part of that planned expansion, Regus increased its network of offices by a fifth, or by 554 new-builds to 2,768. Another 300 have been identified so far for this year, so last year’s total seems likely to be exceeded. Mark Dixon, who has run the business from the outset, thinks that there is scope for 20,000 in due course, with the United States, India and China the best options.
Regus is in 106 countries in all, most recently adding Brunei. Some, obviously, are doing better than others. Low prices for commodities and oil are an inevitable drag, as is the Russian economy. That gradual maturing of the network allowed underlying pre-tax profits to march ahead by 50 per cent to £130.4 million in 2015.
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As a growth stock, Regus has been out of favour with the market. The shares, up 6½p at 296p, still sell on more than 20 times earnings. That huge addition to its network suggests future performance will justify this.
My advice Buy long term
Why The investment that has gone in recently, which some in the market doubted, will provide a strong basis for further growth
Ashtead Group
Shares in Ashtead Group have fallen by 26 per cent since their December high, 9 per cent of this yesterday on the arrival of the third-quarter numbers. It is not easy to justify that fall, unless you take a very gloomy view of the American economy and US non-residential construction, which is where the plant hire company makes most of its money.
What seems to have panicked the market was the news that Ashtead is cutting back its planned capital spending for the next financial year, which is seen as a measure of confidence and, the bears fear, presages no good for that US construction market. The company will spend £1.2 billion in the year to the end of April. The sum will be cut to between £700 million and £1 billion for 2016-2017.
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This reflects, though, the end of a hefty programme of spending on replacing old equipment. The average fleet age is now 25 months. This outlay probably accounts for about £300 million of this year’s spending; factor this in and paying for new plant to expand the business is about the same.
There was a slight slowing in revenue growth in the third quarter, to 14 per cent, but the company is still pointing to growth of between 10 per cent and, at its best, 15 per cent next financial year. The cut in spending will boost cashflow and the market expects a hefty dividend increase at the end of this year, which would suggest that the shares (off 81½p at 842½p) enjoy a yield of 2.5 per cent, high traditionally for the stock, and change hands on about ten times earnings. That fall looks well overdone.
My advice Buy
Why There seems little justification for the price fall
Moneysupermarket.com
It is encouraging to learn that the world of price comparison websites is as competitive as they are trying to make the buying of insurance, energy and financial products. Moneysupermarket.com gets about half its revenues from insurance; of the three main competitors, one has been throwing its weight around and about £10 million more was spent by the industry on TV advertising.
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The company’s revenues from insurance, therefore, fell by 10 per cent in the fourth quarter and by 4 per cent so far this year. Moneysupermarket is reacting by raising marketing spending by £3 million to £5 million, hoping that this can be done in a clever enough way to bring in extra business and not affect margins.
The two other legs, money and home services such as utilities, are doing well enough, with revenues up 23 per cent and 67 per cent, respectively, last year, and across the group these are up by 12 per cent so far this year. The sites are adding on new users and new product providers, so growth should continue. The shares, up 8p at 346¼p, are trading well off their highs but still sell on 23 times earnings, which suggests upside may be limited.
My advice Avoid for now
Why Markets are competitive and multiple is high
And finally . . .
It would be a shame if, on such a busy day, IP Group was overlooked. This takes high-tech spin-offs from academe and develops them to a condition where they can be floated or sold, protecting their valuable intellectual property along the way. Such stocks favour the patient investor and the shares have not been good performers since the autumn, in a market that does not like risk. The value of the portfolio grew from £350 million to £552 million in 2015, or about half the market capitalisation.
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