Investment Column: Valuation clouds the Regus growth story

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The Independent Online


Our view: hold

Share price: 116.6p (+16.1p)

Last year was a mixed one for Regus, the office rental company, but the City gave its annual results a resounding thumbs up yesterday.

The shares rocketed after Regus delivered a better-than-expected performance on underlying cash, which came in at £109.7m, and a 22.3 per cent margin, despite getting little help from the macroeconomic conditions in many of the 85 countries where it operates. That said, 2010 was not a year without pain for Regus, particularly in the UK.

On home soil, it undertook a restructuring drive and incurred exceptional charges of £15.8m, which related to measures including a combination of asset write-downs, dilapidation on premises and closure costs associated with three business centres. When these 2010 costs and a net exceptional gain in the prior year is taken into account, the group's operating profit tumbled by nearly 70 per cent to £23.8m last year.

Its UK revenues also fell 7 per cent to £178.9m while slipping to £281.2m in Europe, the Middle East and Africa. However, at a group level, Regus's revenues were flat at £1.04bn, helped by growing sales in its biggest markets: the Americas, primarily the United States, and the Asia-Pacific region. These regions will be key to Regus, whose offering includes a network of video-conference rooms serving more than 200,000 clients every day, and should help drive operating profit to £126.4m over the next two years, according to analysts.

The company laid the foundation for this growth by streamlining its operations and ramping up its marketing spending last year. Regus also boasted a 69 per cent uplift to 540,000 in its Businessworld card members, such as those who may need a meeting room at short notice, as more companies embrace more flexible or remote working practices.

However, while Regus appears to have turned a corner, we find it hard to recommend its shares, which trade on on a lofty forward earnings multiple of 22 times.

Given such a demanding rate, we would advise caution until they cool down a bit after yesterday's powerful surge.


Our view: buy

Share price: 18.5p (+0.25p)

Ever telephoned a customer service helpline and end up in a queue for what seems like hours? Such episodes, which have spawned thousands of skits from stand-up comics and earned thousands of pounds for therapists, could be a thing of the past if Netcall has anything to do with it.

Those ringing up companies using its technology, including the florist Interflora and Lloyds Bank, will have their details taken by an answer machine and receive a call back from a person, rather than waiting on the line as their lives slowly slip away.

Yesterday, the group revealed that revenues and earnings before interest, taxation, depreciation and amortisation had more than trebled in the six months to December

The majority of the contribution was from the acquisition of Telephonetics, whose integration is proceeding well, and which has already generated £1.5m of annualised cost synergies for the year.

On a pro-forma basis, its SaaS – or software as a service – maintenance and support contract revenues were up 7 per cent, with licence and professional services coming in flat.

The stock is in a good position to push on once the deal is fully integrated; it has no debt and the majority of revenues are recurring. At around 12 times forward earnings, this looks a good bet.

Renewable Energy Generation

Our view: buy

Share price: 56.62p (+0.12p)

Renewable Energy Generation posted a higher loss before tax from continuing operations when it issued half yearly results yesterday.

But as Evolution Securities highlighted, the company, which is focused on wind energy, is somewhat beholden to "the varagies of the UK weather" when it comes to short-term profits. As you might imagine, then, the snow did not help.

However, look beyond the bald numbers, and REG offers much promise . It has received planning consent for for new farms, increased its generating capacity and commissioned a windfarm near Rotherham, which is currently being built. The onset of gusty weather should help drive business back into the black, presenting an opportunity for investors, in our view.