CWK - Cushman & Wakefield: The Selloff Is Overdone (Rating Upgrade)

2023-04-17 10:52:29 ET

Summary

• Cushman & Wakefield plc shares have lost a third of their value in the past two and a half months, as investors became increasingly concerned about the stock's high financial leverage.
• But Cushman & Wakefield's current valuations are already very depressed, and there are bright spots relating to its Property Management and Facility Management business and the Greystone joint venture.
• I upgrade my rating for Cushman & Wakefield plc to a Hold, as I view the recent sell-down in Cushman & Wakefield's shares as overdone.

Elevator Pitch

I have a Hold rating awarded to Cushman & Wakefield plc ( CWK ) stock. The selloff in CWK's shares in recent months appears to be overdone, considering the stock's current valuation multiples. While Cushman & Wakefield's net debt-to-EBITDA ratio is high, CWK's revenue outlook remains promising considering the prospects of its PM/FM (Property Management and Facility Management) business and the joint venture with Greystone. As such, a Hold rating for CWK is appropriate, which prompted me to raise my rating from a Sell previously.

CWK's Share Price And Valuations

Earlier, I downgraded my rating for Cushman & Wakefield from a Hold to a Sell with my prior update for the company published on January 29, 2023. In that article, I highlighted downside risks for CWK relating to its high financial leverage.

In my opinion, the negatives for Cushman & Wakefield have been priced in, taking into account CWK's recent stock price performance and its current valuations.

Since the publication of my previous write-up, Cushman & Wakefield's shares have dropped by -33% as compared to a +2% rise for the S&P 500 (SP500) as per Seeking Alpha price data. In other words, CWK's stock has underperformed in both absolute and relative terms for the last two and a half months.

Peer Valuation Comparison For CWK

Source: S&P Capital IQ.

The market currently values Cushman & Wakefield at a substantial discount to the company's key peers based on the forward normalized P/E and EV/EBITDA valuation metrics as per the peer valuation comparison table presented above. Separately, CWK's current valuation multiples are below their historical averages. The three-year mean consensus forward next twelve months' EV/EBITDA and normalized P/E valuation multiples for Cushman & Wakefield were higher at 9.0 times and 10.6 times, respectively.

In the subsequent sections of the article, I touch on the key negatives and positives for Cushman & Wakefield.

Higher Financial Leverage And Interest Expenses Expected For CWK In 2023

In my earlier January 29, 2023 article, I noted that Cushman & Wakefield's net debt-to-EBITDA or net leverage metric was reasonably high at approximately 2.8 times as of end-Q3 2022. Based on a review of the company's most recent Q4 2022 financial results released on February 23, 2023, CWK's financial position has worsened slightly, and the near-term outlook isn't encouraging.

As of December 31, 2022, Cushman & Wakefield's net leverage ratio was 2.9 times. At its Q4 2022 earnings briefing , CWK acknowledged that its current net debt-to-EBITDA metric was at the high end of its long term financial leverage target of 2-3 times. More significantly, Cushman & Wakefield guided at its most recent quarterly earnings call that it expects a higher net leverage ratio and an increase in interest expenses for 2023 due to lower EBITDA and rising interest rates.

Based on my estimates, I think that CWK's net interest expense could potentially increase by a mid-teens percentage in 2023, while I see the company's net debt-to-EBITDA rising to as high as 3.3 times for the current year. In contrast, the sell-side expects CBRE to be in a net cash position by end-2023 and forecasts that JLL will end this year with a net leverage ratio of 0.78 times as per S&P Capital IQ's consensus data.

Considering the company's unfavorable financial position, it is reasonable that Cushman & Wakefield's stock has done poorly in recent months. But Cushman & Wakefield's share price correction appears to be overdone, as the stock is now trading at depressed valuations and there are positives relating to CWK which are detailed in the next section.

Bright Spots For Cushman & Wakefield Amid The Gloom

Cushman & Wakefield does have some investment merits which investors shouldn't ignore, notwithstanding the company's high financial leverage.

One key positive for CWK is its PM/FM business. Cushman & Wakefield disclosed at its Q4 2022 results call that its PM/FM business' fee revenue grew by +8% YoY in the recent quarter, and it guided for a reasonably decent "low to mid-single-digit (fee) revenue growth" for this service line in the current year.

It is inevitable that Cushman Wakefield's capital markets and leasing service lines will be under pressure assuming that the global economy underperforms in 2023. But the favorable outlook CWK's PM/FM business, which contributed 46% of the company's total fee revenue last year, should mitigate the downside risks relating to its top line for this year.

The other key positive for Cushman & Wakefield relates to the company's joint venture with Greystone which has been set up since late 2021. In a prior November 26, 2021 write-up for Cushman Wakefield, I highlighted that the "joint venture will enable CWK to tap on Greystone's debt offerings to better serve its clients in the multi-family space."

Recent management commentary and news flow suggest that Cushman & Wakefield is making good headway in expanding its presence in the multi-family segment leveraging on its partnership with Greystone.

On March 13, 2023, CWK revealed that it advised on a "fixed-rate agency financing for The Beacon, a six-building multifamily complex" which had Greystone offering the funding for the deal. Earlier in February this year, Cushman & Wakefield disclosed that it had partnered Greystone on "four recent affordable housing acquisition and rehabilitation development transactions."

At the company's Q4 2022 results briefing, Cushman & Wakefield specifically mentioned that it is "excited about this partnership" with Greystone, which it expects to support plans to "build out our full service multifamily platform to drive market share gains." Therefore, the medium to long term revenue outlook for CWK is good, considering the prospects of further penetration into the multi-family segment.

Concluding Thoughts

The current risk-reward for Cushman & Wakefield plc stock is balanced, implying that a Hold rating for CWK is fair. Cushman & Wakefield plc's current financial position is weak, but this has already been priced into its valuations.

For further details see: