Investment Summary
 

1  Watkin Jones Plc has a strong fundamental track record, based on its consistent delivery.

2. The company has a competitive advantage due to high entry barriers in the respective industry.

3. The Group offers complete solutions for the investors according to their needs.

4. The company has a low risk and capital-light business model, which makes its growth sustainable.

5. Resilient business with excellent earnings and cash flows opportunities will boost the group’s business growth trajectory.
 

Business Overview

Watkin Jones Plc (LON: WJG) provides an end-to-end solution in developing large scale, multi-occupancy accommodation projects, with a primary focus on the student accommodation market. The company is one of very few players that operate across the entire development lifecycle from site procurement, planning and construction to ultimate scheme management. Watkin Jones’s end to end solution is unique, which provides a degree of protection if competition in the sector increases due to the attractive market dynamics that exist. The company believes that the focus, market knowledge and ability to work across the entire development cycle can potentially help to provide a competitive advantage and ability to enhance returns. Watkin Jones’s geographical coverage, its focus on and experience in the sector leaves it well placed to compete with other market participants who either do not specialise in student accommodation or operate an owner/asset manager model. Established in 1791, the Watkin Jones business has evolved from a joinery manufacturer and undertaker into a regional building contractor, and subsequently into a UK wide developer, specialising in large scale purpose built student accommodation (PBSA) and residential developments. The Group has delivered over 28,000 student beds across 88 sites in the UK by the end of 2015.

Key Statistics



Top Shareholders


(Source: Thomson Reuters)

Business Model


(Source: Preliminary Presentation, Company Website)

The company’s business model is divided into certain stages, starting from identifying site. Intermediate stages include the negotiation of site purchase, obtain planning consent, marketing of opportunity, negotiation of land scale, completion of land purchase and construction of the asset. The last stage is the practical completion.

Business Strategy

The Group core strategy is to be one of the leading developers of student accommodation in the UK. The company uses its business model to increase its revenues and profitability with minimum risks. The Group’s business is also extending into PRS to capitalise on the similarities of this business with its core expertise. The Group engages its existing relationships with institutional investors to fund these projects. The company focuses on developments which are already in existence. The Group is also focusing on its private rental services (PRS) solutions for its existing and new clients using a similar model. The company is also developing out the remaining residential land bank as well as strategically acquiring new sites for residential development.

Projects Pipeline

PBSA Division


(Source: Preliminary Presentation, Company Website)

The company has several decent projects in its pipeline for the future years. The company is making progress in all the areas - forward sales, site purchase, planning consents, on-site, etc.

BtR Division


(Source: Preliminary Presentation, Company Website)

The Group has witnessed growth across the development lifecycle and has sufficient headroom to grow with supply chain, trade packages and subcontractors.

Growth Overview


(Source: Preliminary Presentation, Company Website)

The Group has witnessed a consistent growth in its units under management. The units have grown from around 2,000 in 2010-11 to around 17,000 in 2019-20.


(Source: Preliminary Presentation, Company Website)

In 2010-11, the company had only its self-built units which amount to 2,265. In 2019-20, the number of units increased to 17,721, out of which Watkin Jones built units were only 56 per cent of the total units, while 44 per cent of the total units were the third party built units.

Revenue Segmentation


(Source: Preliminary Presentation, Company Website)

The major part of the total revenue was generated by PBSA segment (66 per cent) followed by BtR segment (20 per cent) and Residential segment (10 per cent).

Industry Outlook


(Source: Preliminary Presentation, Company Website)

The current market size of BtR segment is expected to grow from 140,000 units in 2019 to 1.7 million units by the year 2071. In terms of value, it is expected to grow from GBP 35 billion in 2019 to GBP 544 billion by 2071.

The current market size of PBSA segment is expected to grow from 620,000 beds in 2019 to 910,000 beds by the year 2030. In terms of value, it is expected to grow from GBP 51 billion in 2019 to GBP 75 billion by 2030.

Market Share


(Source: Preliminary Presentation, Company Website)

In PBSA Developer Ranking, Watkin Jones stood at 1^st Position in terms of beds delivered in 2019 while in BtR Developer Ranking, it was among the leading developer in terms of BtR units built.

Financial Highlights – Financial Year 2019


(Source: Preliminary Report, Company Website)

In the fiscal year 2019, the company’s revenue grew by 3.2 per cent to GBP 374.8 million as compared to GBP 363.1 million in the fiscal year 2018, due to strong growth in build to rent ('BtR') revenues. Gross profit during the period increased by 6 per cent to GBP 76.8 million against GBP 72.4 million in FY2018. Adjusted operating profit in FY2019 increased by 5.4 per cent to GBP 52.3 million versus 49.6 million in FY2018 while adjusted profit before tax increased by 4.5 per cent to GBP 52.3 million as compared to GBP 50.1 million in the fiscal year 2018. Adjusted basic earnings per share was up by 4.6 per cent to 16.7p against 16p in FY2018. The company declared a dividend per share of 8.35p, up by 9.9 per cent as compared to 7.6p in the fiscal year 2018.

Key Performing Indicators


(Source: Preliminary Presentation, Company Website)

The Group’s revenue witnessed a growth of 12 per cent on CAGR basis from FY2016 to FY2019, grew from GBP 267 million in FY2016 to GBP 374.8 million in FY2019.

The Group’s gross profit witnessed a growth of 12.8 per cent on CAGR basis from FY2016 to FY2019, grew from GBP 53.8 million in FY2016 to GBP 76.8 million in FY2019.

Financial Ratios 
 
 

The reported EBITDA margin in FY19 was 14.30 per cent against the industry median of 56.80%. The reported operating margin was 13.30 per cent for the FY19. Net margin reported was 10.8 per cent for the fiscal year 2019, lower from the industry median of 75.1%. Return on equity for the same period stood at 24.50 per cent. On the liquidity front, Watkin Jones Plc’s current ratio stood at 3.03x. On leverage front, the debt-equity ratio of the Watkin Jones Plc’s was 0.22 i.e. the company is less leveraged than the industry with debt-equity ratio of 0.74.

Share Price Performance


Daily Chart as on 24^thMarch 2020, before the market closed (Source: Thomson Reuters)

On March 24, 2020, at the time of writing (before the market close, at 9:05 AM GMT), Watkin Jones Plc shares were trading at GBX 139, up by 2.21 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 299.50/GBX 118.17. The group’s stock is reflecting higher volatility as against the benchmark index based on the company’s beta of 1.3068.

From the technical standpoint, 14 days-Relative Strength Index of the stock is hovering near the oversold zone, which is strengthening the upside move.

Valuation Methodology

Method 1: EV to EBITDA Approach (NTM)



To compare Watkin Jones Plc with its peers, EV/EBITDA multiple has been used. The peers are Berkeley Group Holdings Plc (NTM EV/EBITDA was 5.43), Taylor Wimpey Plc (NTM EV/EBITDA was 3.75), Barratt Developments Plc (NTM EV/EBITDA was 3.61), Persimmon Plc (NTM EV/EBITDA was 3.92) and Harworth Group Plc (NTM EV/EBITDA was 9.56). The Average of EV/EBITDA (NTM) of the company’s peers was 5.25x (approx.)

Method 2: Price to Earnings Approach (NTM)



To compare Watkin Jones Plc with its peers, P/E multiple has been used. The peers are Berkeley Group Holdings Plc (NTM P/E was 8.15), Redrow Plc (NTM P/E was 3.52), Vistry Group Plc (NTM P/E was 4.61), Taylor Wimpey Plc (NTM P/E was 5.51), Barratt Developments Plc (NTM P/E was 4.95), Persimmon Plc (NTM P/E was 5.82), Helical Plc (NTM P/E was 28.42) and Harworth Group Plc (NTM P/E was 11.51). The average of P/E (NTM) of the company’s peers was 8.71x (approx.)

Valuation Metrics


(Source: LSE)

As on 28^th February 2020, the company’s EV/EBITDA multiple is 10.7x which was lower as compared with the industry, which shows that the company is underpriced than the industry.


(Source: LSE)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that’s driving ROE.

Watkin Jones V/S FTSE-AIM 100 Price – 2 Years


(Source: Thomson Reuters)

In the last two years, Watkin Jones Plc share price has declined 26.49 per cent return as compared to 42.65 per cent decline of FTSE-AIM 100 index, which shows that the stock has outperformed the index during the last two years.

Dividend Yield


(Source: Thomson Reuters)

Watkin Jones Plc has a dividend yield of 6.14 per cent, which is lower than the industry dividend yield of 8.47 per cent and the sector dividend yield of 8.47 per cent.

Watkin Jones V/S Industry V/S Sector – 1 year


(Source: Thomson Reuters)

In the last one year, Watkin Jones Plc share price declined by 37.47 per cent which is lower than the industry decline rate of 38.2 per cent and sector decline of43.61 per cent.

Watkin Jones Total return- 5 years


(Source: Thomson Reuters)

In the last five years, Watkin Jones Plc has delivered a total return of 53.81 per cent while the FTSE All share index has delivered a total return of negative 4.935 per cent.

Growth and Risk Assessments

A downturn in the economic cycle and a change in investor sentiment could reduce the demand for its developments. Increased competition could increase land prices or make it harder to secure attractive sites. The Group could be constrained in its ability to secure the new sites required to support its growth strategy. An inadequate supply of available land would inhibit the Group’s ability to deliver its growth strategy or could increase the risk of acquiring sites in less attractive locations or at higher prices. Failure in cybersecurity could hamper its operations as well as the reputation of the Group. However, the Group’s business model is robust through different cycles. The BtR market offers significant growth potential, while its core student accommodation business is performing well which could sustain its business growth. The Group has a bright future and the company is confident of further progress in the coming year.

Conclusion

During the fiscal year 2019, the company reported a decent financial performance. The Group has a robust and capital light business model which could play a vital role in the sustainable growth of its business.  Despite the challenging conditions, the Group has delivered profitable growth. Build to rent segment made a significant contribution to the Group's results and is expected to become an important growth driver for the Group in the coming years. The Group is positive about the outlook for both the student accommodation, BtR sectors, and is expected to continue to grow its business, in line with business strategy. The company prospects are looking good, and it could provide a decent value to its investors in the long term.

Based on decent prospects and support from the valuation as done using the above two methods, we have given a “Speculative Buy” recommendation at the current price of GBX 135 (as on 24th March 2020 at 8:00 AM GMT) with lower double digit upside potential, based on 5.25x NTM EV/EBITDA (approx.) on FY20E EBITDA (approx.) and 8.71x NTM P/E (approx.) on FY20E earnings per share (approx.), considering current uncertainties related to Brexit, Coronavirus outbreak and challenging economic conditions in the UK market.
 
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.

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