Shares of Regus (LSE: RGU) fell by up to 7% in early trade after the office space provider announced plans to open at least 450 new business centres in 2014, which will incur initial operating losses and depress full-year earnings.
Regus said that the strategy will drive revenue, profit and cash flow over the long term. Regus has already invested £149m to add nearly 200 business centres this year — including their 2,000th centre in Boulder, Colarado — and the investment programme is underpinned by solid underlying performance, with profitability from the mature business converting strongly into cash.
Regus’s business centres which opened in 2010 and 2011 are earning post-tax returns of 25%, and the group is confident that it can earn similar returns from future openings. Total reported revenue increased 17% to £805m and operating profit soared 41% to £40m. Adjusted for currency translation, however, operating profit improved a lesser 16% to £21.5m.
The chief executive, Mark Dixon, commented:
“The rapid pace of change within the world of work presents many opportunities for us to help businesses be more successful. We continue to find compelling opportunities to invest and generate returns well in excess of our cost of capital. These returns underpin our growth strategy … Overall, our underlying momentum is strong.”
In line with its progressive dividend policy, the Regus board has declared a 14% increase to the interim dividend of 1.25p per share.
While the market took fright at the revised earnings guidance for 2014, this could be just a blip on the road the far greater prosperity. I’ll leave you to decide, then, after scrutinising the potential future returns, whether the shares are a ‘buy’ or not.
