Watkin Jones PLC (LON: WJG) – Operating with a decent forward sale order book and having a cash-rich business model

Established in 1971, Watkin Jones PLC is a FTSE AIM UK 50 index listed Property Development Company, which provides solutions related to the development of multi-occupancy accommodation projects with a focus on the ‘student accommodation’ and ‘build to rent’ market. It operates across the entire development lifecycle from procurement, planning, construction to final scheme management. The Company operates through four segments, namely Purpose Built Student Accommodation (PBSA), Build to Rent (BtR), Residential, and Accommodation Management. The Group is the United Kingdom’s leading developer and manager of residential for rental properties. It has completed 123 developments with 41,000 beds since 1999. The FPG (Fresh Property Group) is their accommodation manager, which manages approximately 18,000 student beds on behalf of institutional clients.


 (Source: Presentation, Company Website)

Key Fundamental Statistics



Industry Outlook Dynamics

According to the British Property Federation, the market value of UK real estate is worth around £1,662 billion, which represents 21% of total net wealth. In 2019, the real estate contributed 7% of the total GDP of the UK economy. As per the Cushman & Wakefield’s report on ‘UK Student Accommodation 2018/19’, there were around 627,000 PBSA beds available at the start of 2019 and the market could reach 910,000 beds by 2030. Moreover, there is a substantial opportunity in the PBSA sector as the full-time student population continues to rise in the UK, with nearly 50,000 students per year in the past few years.

Recent Sector Updates
 

1. On 8 July 2020, UK Chancellor Rishi Sunak temporarily raised the threshold for stamp duty from £125,000 to £500,000. This cut in taxes will run until 31 March 2021. According to a property website, there was a 35% rise (in the five days following the announcement of stamp duty holiday, against the same period last year) in the number of houses sold in England and 2.4% (£320,265 between 7-11 July 2020) increase in the average asking prices (compared to pre lockdown scenario in March) as reported by Rightmove.

2. As per IHS Markit, the UK Construction purchasing managers’ index (PMI) rose from 28.9 in May to 55.3 in June. It was primarily driven by the resumption of constriction sites after Covid-19 lockdown easing. ·        
 

The IHS Markit/CIPS UK Construction PMI: A reading above 50 indicates expansion in the construction industry; a reading below indicates contraction.


(Source: IHS Markit)

Growth Prospects and Risk Assessment

The Group has a strong pipeline of developments, due for delivery over the next few years, which underpins the visibility of secured revenues and cash flows. Moreover, the residential business has been performing strongly despite the short-term headwinds during the pandemic. It is primarily due to the momentum built through the pre Covid-19 scenario, following the 27% rise in FY19 revenue (versus FY18). During the pandemic, the Group has been maintaining substantial liquidity and operating resiliently by working closely with the clients and supply chain participants. The Company has asset-light, capital-light, cash-rich, and forward sale business model to stay resilient and navigate through the uncertain period. The BtR (Build-to-rent) market offers significant growth potential, while the core student accommodation business is performing well, which could sustain business growth. The Group’s business model is robust through different cycles, and the Company is confident of further progress in the coming year. The Group has a strong financial discipline with a robust and well-positioned balance sheet.

However, there are certain risks to the business operations, such as a change in the economic cycle can impact the real estate market and investor confidence. Also, increased competition can disrupt the profitability in the attractive PBSA and BtR markets. Moreover, the inadequate supply of available land can hamper the growth strategy. The delay in the project deliveries can also impact the Group’s reputation and can cause a significant financial penalty. The Group could be constrained in its ability to secure the new sites required to support the growth strategy. Increased competition could increase land prices or make it harder to secure attractive sites. Failure in cybersecurity could hamper operational performance as well as the reputation of the Group.

Segment Analysis

Geographically, all the revenues arise in the UK. Operationally, the Group bifurcates the business into the following four segments:

1. Purpose Built Student Accommodation (PBSA) - manages the development of student accommodation.

2. Build to Rent (BtR) – the development of BtR accommodation.

3. Residential – development related to traditional residential property.

4. Accommodation Management – manages the BtR and PBSA property. 


 (Source: Presentation, Company Website)

Synopsis of Recent Developments

19 May 2020: The Group announced that the Chief Executive Officer, Richard Simpson purchased 49,186 equity shares, representing 0.02% of the Company's issued share capital.

1 April 2020: The Company announced the forward sale at Wilder Street (Bristol) for delivery of 348 bed PBSA scheme in FY21. Overall, in the H1 FY20, the Group secured forward sale of over 2,600 apartments in BtR’s pipeline and development of 7,000 beds in PBSA pipeline.

Operational Key Performance Indicators


 (Source: Presentation, Company Website)

Top Shareholders Statistics


 

Operational Update – H1 Financial Year 2020 (31^st March 2020)

The Company remobilised construction activities wherever possible with a strict health & safety protocol. The Group’s sites located in Northern Ireland, England and Wales are operating with around 75% capacity versus pre-covid-19 levels. As per the instructions of the Scottish Government, WJG closed its two sites based in Scotland. The Group witnessed encouraging results from early progress to reduce the impact of disruption to student accommodation deliveries for the financial year 2020 with six schemes targeted for Q3 FY2020 delivery and one scheme targeted for Q4 FY2020 delivery. The Group expects an increase in costs to complete the committed development programme during the disruption related to Covid-19 mayhem. The outcome for the financial year 2020 is dependent on the completion of 7 student accommodation. The activity related to land purchase markets and institutional forward sale has been on a lower side in H1 FY2020 and is expected to increase in the H2 of the financial year 2020. The Group has a strong financial position and will leverage it for site acquisitions and forward sales in the short-term period. The Company is also offering support to students through rent relief for short-term and rent relief occupation periods. WJG has implemented measures for cash conservation and is using Job Retention Scheme launched by the UK Government for furloughed employees.

Financial Highlights – Improved Financial Performance in H1 FY2020 (31^st March 2020)


(Source: Interim Report, Company Website)
 
In the first half of the financial year 2020, driven by a strong performance from student accommodation development and build to rent for the period, the revenue increased by 16.7% to £185.7 million (H1 FY2019: £159.1 million). The Gross profit increased by 8% to £41.9 million in H1 FY2020 (H1 FY2019: £38.8 million), reflecting an increase in revenue. The adjusted EBITDA stood at £34.2 million in the first half of the financial year 2020 (H1 FY2019: £32.1 million), reflecting an increase of 6.5%. The EBITDA surged by 15.9% to £34.2 million in the first half of the financial year 2020 (H1 FY2019: £29.5 million). The Group’s adjusted PBT (profit before tax) stood at £26.6 million in H1 FY2020 (H1 FY2019: £25 million), reflecting an increase of 6.4% for the period. The statutory PBT (Profit before tax) increased by 18.8% to £26.6 million in H1 FY2020 (H1 FY2019: £22.4 million), driven by strong growth of revenue and adjusted EBITDA. The adjusted basic earnings per share stood at 8.44 pence in H1 FY2020 (H1 FY2019: 7.77 pence), and basic earnings per share stood at 8.44 pence in H1 FY2020 (H1 FY2019: 6.96 pence), reflecting growth of 21.3%. Net cash stood at £37.5 million as on 31^st March 2020 (31^st March 2019: £18.3 million).

Financial Ratios – Strong Liquidity versus Industry Median 
 
  
 
Reported profitability metrics for the first half of the financial year 2020 were in line with the last year data for the same period. The Group managed to show decent profitability and reflected better control over expenses. Watkin Jones Plc has delivered a decent return for the shareholders of 13.1%, which was higher as compared to the industry median of 6.1%, reflecting efficient utilisation of equity capital. On the liquidity front, the current ratio was higher than the industry median of 1.49, reflecting sufficient current assets to pay short-term obligations. It reflects a robust liquidity profile to tackle the uncertainty due to covid-19 outbreak. On leverage front, the debt-equity ratio was 1.07x, which was higher as compared to the industry median, reflecting that the Company is more leveraged as compared to the industry.  

Share Price Performance Analysis


Daily Chart as on 21^st July 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On July 21, 2020, at the time of writing (before the market close, at 10:00 AM GMT+1), Watkin Jones Plc shares were trading at GBX 139.50, up by 0.07% against the previous day closing price. Stock 52 week High and Low were GBX 299.50 and GBX 118.17, respectively.

Bullish Technical Indicator

From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology

Price/Earnings Approach (NTM)



To compare Watkin Jones Plc with peers, Price/Earnings multiple has been used. The peers are St Modwen Properties Plc (Price/NTM Earnings was 15.26), Berkeley Group Holdings Plc (Price/NTM Earnings was 14.16), Countryside Properties Plc (Price/NTM Earnings was 11.34), Barratt Developments Plc (Price/NTM Earnings was 7.48) and Taylor Wimpey Plc (Price/NTM Earnings was 6.81). The Average of Price/Earnings (NTM) of the company’s peers was 11.01x (approx.).

Watkin Jones Plc Vs FTSE AIM 100 Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five years, Watkin Jones Plc share price has delivered 38.08 per cent return as compared to 34.25 per cent return of FTSE-AIM 100 index, which shows that the stock has outperformed the index during the last five years.

Business Outlook Scenario

The Company reported a decent financial performance in the first half of the financial year 2020. Both the top-line and the bottom-line performance have improved, with an increase in the profitability for the period. The Group has a robust and capital-light business model, which could play a vital role in the sustainable growth of business. 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 outcome for the financial year 2020 is dependent on the completion of 7 student accommodation, and the Group witnessed encouraging early progress to mitigate the disruptions caused by the covid-19 mayhem. The activity related to land purchase markets and institutional forward sale is expected to improve in the second half of the financial year 2020. The Company prospects are looking good, and it could provide decent value to investors in the long term.


 (Source: Presentation, Company Website)
 
Over the course of 4 years (FY15 - FY19), the company’s revenue surged from GBP 244.25 million in FY15 to GBP 374.79 million in FY19. Compounded annual growth rate (CAGR) stood at 11.30 per cent.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation at the current price of GBX 139.50 (as on 21July 2020, before the market close at 10:00 AM GMT+1), with lower double-digit upside potential based on 11.01x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.). 
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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