By Reus Investments
In this video we introduce Regus, which in our view is a cash compounder that can be bought at 10% FCF yield with very little debt.
VALENTUM – Regus Investment Case
Regus manages business centers around the World with more than 2.800 in 1.000 cities and more than 100 countries. It is the only company with a worldwide scope, being one of its main differentiations vs. competitors. About 40% of their sales come from the US, 21% from UK, 21% from Europe and 14% from Asia.
The business model generates a lot of cash (above 100% EBIT) due to low capex (they co-invest with the landlord) and negative working capital (2 months of guarantees, and they charge the month in advance). This is the key driver to have a sound balance sheet (0,5x NFD/EBITDA) even with new openings.
Management has skin in the game. CEO Mark Dixon owns 27.8% (although he recently did a placement fo c3% we believe he is very committed to the company) and new CFO Dominik de Daniel has recently bought into the stock (GBP1mn). We believe Mr. De Daniel is giving the company a new push, focusing on maximizing returns on investment and NWC across the organization. We think this is key and is being implemented very well. Mr. De Daniel already did a very good job at Adecco, we recommend the reader to research more on his career.
The investment thesis key is the growing profitability, as mature centres keep a sound occupancy rate and new centre’s profitability reach their cruising speed from their third year. For this, it is important that openings are done in either cities/areas where occupancy is saturated or new cities where the opportunity is detected or it can be started with a big client.
Mature centres (more than 2 years) are cash cows and new centers are the growth. We recommend to look into the tables and charts of the presentation attached where it can be clearly seen how today’s capex results in an increased FCF two years after. The key to this investment is that it is a clear compunder. The risk is its cyclicality.
We value on an SOP model: Mature Business vs. New openings. Why? The business is the same, but mature centres are Cash-Cows and new centres consume cash. When looking at the company as an overall, it looks a bit expensive. But when we analyse independently mature and new centres we understand that this is a compounder! Because New centres end up bringing more cash!
We believe Regus is a very good company with a very good management that is taking measures to improve returns. The stock has been punished for a placement of the main shareholder and probably too because it might be seen as a UK Real Estate proxy, something we think is not true and there is a big opportunity to buy it at a discount to its fair value. It is our second largest position in Valentum at 9.6% of the fund’s total assets.