Elevator Pitch
My rating for Cushman & Wakefield plc (NYSE:CWK) shares remains as a Hold. In my earlier April 17, 2023 write-up for CWK, I noted that “the negatives for Cushman & Wakefield have been priced in.”
With this latest update, I try to identify potential catalysts that might drive a re-rating of Cushman & Wakefield. My analysis leads me to the conclusion that CWK shares are most probably going to stay range-bound for the near term warranting a Hold rating, as there aren’t any catalysts in sight.
CWK Is Unlikely To Beat Guidance
As per its Q1 2023 results presentation, CWK has guided for a “low to mid-single digits” percentage growth in PM/FM (Property Management/Facility Management) revenue and a normalized EBITDA margin in the “9 -10%” range for full-year FY 2023.
In my opinion, Cushman & Wakefield will find it difficult to achieve PM/FM fees and EBITDA profitability which exceed its guidance this year.
With regards to PM/FM revenue, CWK mentioned at the company’s Q1 2023 earnings call that “winning new office contracts” has been the key contributor to its “very strong growth in our outsourcing (PM/FM) business.” In other words, the health of the office market is correlated with Cushman & Wakefield’s PM/FM top line.
Companies in general appear to have issues getting their employees to return to offices, and this has negative read-throughs for Cushman & Wakefield’s PM/FM business. The New York Times reported on June 20, 2023, that many employers are throwing in all sorts of “incentives like $10 to the charity of their choice” as part of efforts to bring their staff back to offices, and this implies that it has been a struggle trying to push through the return to office mandate. Separately, a June 26, 2023, BBC news article cited Kastle Systems’ research indicating that “the average workplace occupancy among 41,000 businesses in the US hovered below 50%.”
As such, I don’t expect CWK’s PM/FM business to deliver a revenue growth rate in excess of a “low to mid-single digits” percentage in the current year as it guided for.
Separately, Cushman & Wakefield’s guidance points to the company’s non-GAAP adjusted EBITDA margin to decrease by -290 basis points from 12.4% for FY 2022 to 9.5% in FY 2023 based on the mid-point of its guidance. In my view, there is a low probability of CWK’s actual normalized EBITDA margin for FY 2023 exceeding the company’s operating profitability guidance.
At its first quarter results briefing, CWK revealed that it is “evaluating additional cost measures.” But Cushman & Wakefield acknowledged at its most recent quarterly earnings call that the impact of these new expense optimization initiatives on the company’s profitability in FY 2023 “will be fairly muted”, as it is “already halfway through the year.”
CWK has already taken into account its ongoing cost management efforts in outlining its 9%-10% normalized EBITDA margin guidance for the current fiscal year. Therefore, even if Cushman & Wakefield rolls out new expense management plans in the second half of this year, it is unlikely to have a major effect on CWK’s full-year EBITDA margin.
In summary, positive surprises associated with CWK’s financial performance for the rest of this year are less probable.
Deleveraging Is Expected To Be A 2024 Story
The sell-side analysts forecast that Cushman & Wakefield’s net debt-to-EBITDA or net leverage metric will rise from 2.9 times as of December 31, 2022, to 4.0 times at the end of 2023 as per S&P Capital IQ data. The Wall Street’s consensus estimates for CWK relating to financial leverage are in line with the company’s management commentary.
Cushman & Wakefield disclosed at the company’s Q1 2023 earnings briefing expectations of its net leverage ratio rising from 3.7 times at the end of Q1 2023 to 4.1-4.2 times as of December 31, 2023. At its recent quarterly results call, CWK emphasized that its net debt-to-EBITDA metric will be expected to “come down” when its “EBITDA grows and as brokerage comes back”, which is unlikely to happen this year. As I noted in the previous section, my view is that CWK’s actual PM/FM revenue and EBITDA margin for the current year won’t surpass the company’s guidance.
In that respect, deleveraging should be a 2024 story for CWK. Cushman & Wakefield outlined its net leverage goal of 2-3 times at its first quarter results briefing, and the market expects CWK’s financial leverage target to be met next year. Specifically, consensus financial figures sourced from S&P Capital IQ indicate that CWK’s net debt-to-EBITDA ratio as of end-2024 is projected to be 2.94 times.
Closing Thoughts
Catalysts relating to earnings beats and deleveraging are unlikely to be realized for Cushman & Wakefield this year. In the absence of catalysts, I don’t see any reasons to upgrade my rating for CWK to a Buy, even its consensus forward FY 2024 EV/EBITDA multiple of 5.2 times (source: S&P Capital IQ) is undemanding. This explains my decision to maintain a Hold rating for Cushman & Wakefield.
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