Commentary

Despite continued uncertainty in UK politics, sterling strengthened, helping performance in the month. The strategy also benefitted as its largest position, Dart Group (+38%), announced an upgrade to profits following the bankruptcy of its larger rival, Thomas Cook. Petroleum Geo-Services (+25%) performed well after releasing good results and IWG was a major detractor (-6%). These two are discussed in the remainder of this month’s newsletter.

IWG

Over the past few years, the hype around WeWork, IWG’s more famous competitor, has been immense with every new funding round resulting in an ever more impressive valuation. It reached its peak this year on the announcement of plans for its IPO, with the backing of the largest and most blue-chip investment banks, on an expected valuation of over $40bn. The loss-making real estate company was being touted as a fast-growing technology company with a mission to ‘increase global consciousness.’

The IPO documents revealed a group with a weak balance sheet and poor governance practices. Instead of earnings, WeWork felt investors should focus on adjusted EBITDA as a guide to profitability. Warren Buffett has said in the past “when Wall Streeters tout EBITDA as a valuation guide, button your wallet.” Potential investors agreed with Mr Buffett, not WeWork management, dramatically reducing the muted valuation. The IPO was pulled forcing WeWork to turn to its largest outside shareholder, Softbank, and accept expensive equity and debt financing. Adam Neumann, CEO and founder, stepped down. The group’s focus will now be on profitability over growth.

The negative press over WeWork was probably the reason behind IWG’s poor performance in the month. However, a more rational competitor will surely be good for IWG in the long run. The troubles at WeWork have not been seen at IWG as it has continued to grow profitably and is successfully moving towards a franchise model. IWG is on just 12x free cash flow before growth investments – a low absolute valuation and still considerably below WeWork’s valuation.

PGS

Petroleum Geo-Services, a leading producer of 4D seismic data for the offshore oil and gas industry, continues to see improvement in earnings as offshore spend steadily increases. Prices in the contract segment are running 40% above 2018 levels and the order book is double where it was last year. The company generated free cash flow to pay down debt and management reiterated that it will not need to raise equity alongside the refinancing of its balance sheet. The company is comfortably covering its interest payments and, even if some equity is required in order to roll over its debts, the upside would still be more than twice today’s valuation.