Watkin Jones PLC (LON: WJG) – Remarkable Return on Equity against industry underpins strong fundamentals.

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. It was established in the year 1971, and presently, it is the United Kingdom’s leading developer and manager of residential for rental properties. Moreover, 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)

Growth Prospects and Risk Assessment

WJG is one of the leading Construction and Development Companies in the United Kingdom. It has a capital-light business model and generates strong cash flow. The Company’s forward sales stood at £390 million as secured revenue for FY20 and FY21 period. The Company remained strong during H1 FY20 and delivered well against the growth plans. Moreover, it has substantial liquidity after renewed revolving credit facility and cash conversion measures, to emerge strongly in the post-Covid-19 scenario. It has a strong pipeline of developments, due for delivery over the next few years, which underpins the visibility of secured revenues and cash flows. Furthermore, 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). Meanwhile, the BtR (Build-to-rent) market offers significant growth potential, while the core student accommodation business is performing well, which could sustain business growth.

(Source: Refinitiv, chart created by Kalkine Group)

However, the Company’s performance is subject to various kinds of risk, such as dented consumer confidence amid the economic downturn can impact the demand, prices, margins, and cash requirement of the business. Moreover, increased competition can increase land prices, and thus, property development costs. Also, the delay in project deliveries can impose penalties or fines and can cause reputation damage to the organisation. Lastly, failure to comply with legislation or secure adequate capital requirement can significantly affect the growth prospects of the Company. 

Industry Outlook Dynamics

As per the publication from the Research and Markets, the market size of the UK construction industry is projected to register a CAGR of ~8.5% between 2019 to 2024 and reach around GBP 236.8 billion by 2024; however, the market growth is dependent upon the consumer spending, and economic recovery following the pandemic impact.

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.

Meanwhile, the IHS Markit/CIPS UK Construction PMI (Purchasing Managers' Index) expanded to 56.8 in September as compared to 54.6 in August 2020, driven by the bounce observed in the housing market.

Key Fundamental Statistics

 Key Shareholders Statistics

A Glimpse of Business Segments

(Source: Interim Report, Company Website)

Recent Developments

On 18 August 2020, Watkin Jones announced that its Chief Executive Officer, Richard Simpson exercised 441,360 awards granted over ordinary shares of 1 penny each on 17 August 2020 under Recruitment Plan.

Key Performance Indicators

(Source: Annual Report, Company Website)

Financial & Business Highlights – H1 FY2020 (31 March 2020)

(Source: Interim Report, Company Website) 

• In the first half of the financial year 2020, driven by a boosted performance from student accommodation development and build to rent businesses, the revenue increased by 16.7%.
• The Company has a decent profitability margin for the period and strong liquidity with gross cash of £72.4 million and net cash of £37.5 million.
• The Company has a strong financial position and will leverage it for site acquisitions and forward sales in the short-term period.
• The Company remobilised construction activities wherever possible with a strict health & safety protocol, and sites located in Northern Ireland, England and Wales are operating with around 75% capacity versus pre-covid-19 levels.
• The Company closed two sites in Scotland, as instructed by the Scottish Government.
• WJG 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 Company 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 schemes.
• 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 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 Ratios – Strong Liquidity Position versus the Industry Median

Reported profitability metrics for the first half of the financial year 2020 stood higher than the last year data for the same period, reflecting higher revenue and better control over expenses as compared to the industry. Watkin Jones Plc has delivered a decent return for the shareholders’ as return on equity of 13.1% was higher as compared to the industry median of 3.6%. On the liquidity front, Watkin Jones Plc’s current ratio was higher than the industry median of 1.46x, reflecting sufficient current assets to pay the short-term obligations. On leverage front, the debt-equity ratio was 1.07x, which was higher as compared to the industry median of 0.68x, reflecting that the company is more leveraged as compared to the industry.  

Share Price Performance Analysis

 (Source: Refinitiv, chart created by Kalkine Group)

On 6 October 2020 (before the market close, at 11:35 AM GMT+1), Watkin Jones Plc shares were trading at GBX 140.01, down by 3.44% against the previous day closing price. Stock 52-week High was GBX 299.50 and Low of GBX 118.17, respectively.

From the technical standpoint, 90-day RSI is currently supporting an upside move (around 46 level), which means the stock price could increase in the short term.

(Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

(Source: Refinitiv, chart created by Kalkine Group) 

Business Outlook Scenario

During H1 FY20, there was an improvement in the top-line and the bottom-line items of the income statement since it built momentum before Covid-19 disruption. However, the Covid-19 impact and extent are not yet quantifiable, and hence, the guidance remained withdrawn and dividend temporarily stayed suspended. Further, the FY20 performance is dependent upon forward sale activity in H2 FY20, and progress with FY21 deliveries.

However, WJG has adopted precautionary measures for cash conversation and intend to reinstate dividends at the right time. Moreover, it has a robust and capital-light business model, which could play a vital role in the sustainable growth of the business. The BtR segment is likely to become a vital growth driver in the years ahead as the demand for purpose-built private rental could be boosted by institutional hunger and people choosing to rent. Adjacently, the activity related to land purchase markets and institutional forward sale is expected to improve in the second half of the financial year 2020. Overall, the Company prospects are looking good, and it could provide decent value to investors in the long term.

Meanwhile, the housing construction market has got a boost in terms of volume and prices, as the UK Chancellor, Rishi Sunak cut the stamp duty and temporarily raised the threshold for stamp duty from £125,000 to £500,000. The favourable tax reforms shall save £15,000 for buyers (if they are buying a property of £500,000 or more), which can revive the property market hit by the lockdown. Even the UK Construction PMI remained above 50 in September 2020 after the resumption of construction sites post lockdown easing norms.

(Source: Presentation, Company Website) 

Considering the improved financial performance, strong cash position and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Watkin Jones Plc at the current price of GBX 140.01 (as on 6 October 2020, before the market close at 11:35 AM GMT+1), with lower double-digit upside potential based on 10.29x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).  

*Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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