CWK - Cushman & Wakefield: Still Neutral Considering Various Factors

2023-11-23 09:43:19 ET

Summary

• CWK is looking at potential cost reduction and asset sales to limit downside risks associated with its future performance.
• The prospects of Cushman & Wakefield's key services lines, Project Management and Facilities Management and Capital Markets, aren't as favorable as what I would have hoped for.
• I continue to rate CWK as a Hold following an assessment of different factors that affect its financial and stock price performance.

Elevator Pitch

I stick with my Hold rating for Cushman & Wakefield plc ( CWK ) shares. With my previous article for CWK published on September 14 this year, I wrote about the company's free cash flow generation and its Project Management and Facilities Management or PM/FM business.

My attention turns to Cushman & Wakefield's potential asset sales, expense control plans, and the prospects of its key service lines for the latest write-up.

There is uncertainty regarding the future performances of CWK's PM/FM and Capital Market service lines. But CWK is managing costs well and has its eyes on potential asset monetization to support deleveraging. I view Cushman & Wakefield as deserving of a Hold rating in consideration of these factors mentioned above.

Spotlight On Asset Sales And Expense Control

As the commercial real estate services industry struggles in a challenging economic environment, it is wise that Cushman & Wakefield is considering the sale of certain assets and tightening expense control to reduce financial risks and maintain profitability.

At its latest Q3 2023 results call , CWK revealed that it is in the process of "developing a plan for further incremental debt reduction over the next several years" that will be funded by "monetizing small non-core assets." The company stressed that the assets or businesses identified for sale or monetization will be "small in size" and "wouldn't necessarily meet the long-term growth profile" of Cushman & Wakefield.

Cushman & Wakefield's normalized EBITDA was $357.0 million for the first nine months of the current year, while its net interest expense was $224.2 million (or 62.8% of EBITDA) in 9M 2023, as indicated in the company's third quarter earnings release . This shows how CWK's high 4.5 times net debt-to-EBITDA ratio (source: Q3 results presentation ) hurts its profitability, on top of increasing the company's credit risks.

Therefore, it is encouraging to learn that CWK is exploring a new way of sourcing for capital to pay down its outstanding debt, instead of just relying on cash flow generated from day-to-day operations.

On the other hand, CWK has room to cut costs to a larger extent in the next fiscal year.

Cushman & Wakefield noted at the company's third quarter earnings briefing that its "cost savings on a permanent basis would increase from about $130 million (FY 2023 target) to about $160 million" in FY 2024, if it chooses to "hold back on allowing any of those costs (e.g. variable expenses like marketing, travel etc) to come back into the business."

As it stands now, Wall Street is forecasting a -7.7% decrease in CWK's top line and a much more substantial -36.4% fall (source: S&P Capital IQ ) in the company's EBITDA for full-year FY 2023, which is an illustration of negative operating leverage effects. Assuming that the commercial property services market stays weak next year and CWK's top line declines again in 2024, it is up to Cushman & Wakefield to reduce costs more aggressively to offset the unfavorable impact of negative operating leverage.

In summary, I like the fact that CWK is looking at cost management initiatives and asset sales as means of supporting its profit margins and improving its credit profile.

Key Service Lines' Prospects Are In The Limelight

The outlook for CWK's PM/FM and Capital Markets service lines is murky.

I cautioned in my mid-September update that "there is a risk that CWK's actual PM/FM revenue growth for this year falls short of the market's expectations", considering that its "PM/FM business might not be resilient as expected." My concerns regarding Cushman & Wakefield's PM/FM service line seem to be validated by the company's updated full-year FY 2023 guidance.

The company changed its guidance for FY 2023 PM/FM revenue growth from "low to mid single digit" percentage earlier in end-July to "low-single digit" percentage now. Cushman & Wakefield explained that a high base for FY 2022 and below-expectations project management activity in the Asia Pacific region prompted it to revise its guidance downwards.

Given that the PM/FM service line is perceived to be the most defensive of CWK's businesses for its high proportion of recurring revenue, it is a disappointment that Cushman & Wakefield is only anticipating modest growth from this segment.

Separately, Cushman & Wakefield's most cyclical and economically sensitive service line, Capital Markets, suffered from a -33% drop in constant-currency fee revenue for the third quarter of FY 2023.

A swift recovery for CWK's Capital Markets service line doesn't seem very likely. CWK shared at the company's Q3 2023 earnings call that it is "taking a point of view that leans toward" a turnaround for Capital Markets in "the second half of next year" assuming "rate stabilization" happens by then. At the same time, Cushman & Wakefield also acknowledged that "predicting the timing" of "the rebound (for Capital Markets) is really difficult."

In other words, Cushman & Wakefield sees a significant improvement in the performance of the Capital Markets business happening in 2H 2024, which can be referred to the company's base case scenario forecast. Assuming that this is correct, this will still be some time away or three quarters or more to be specific. On the flip side, if there is a change to Fed policy that affects rates, a worst case scenario might see the recovery timeline for CWK's Capital Markets service line pushed back to Q4 2024 or even 2025.

In a nutshell, I find it hard to have confidence in the short term prospects for the company's Capital Markets and PM/FM service lines.

Closing Thoughts

I keep my Hold rating for CWK unchanged. There are good reasons to be worried about the outlook for the company's PM/FM and Capital Markets businesses. But Cushman & Wakefield's future financial performance is expected to be supported by expense control and asset sales to some extent.

For further details see: