Watkin Jones PLC (LON: WJG) – Reported decent financial performance and foundations in place to drive future growth.

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

Watkin Jones has met its FY20 objectives by delivering 2,609 PBSA beds, by selling 95 residential homes, and 159 BtR units. Moreover, it has a secured pipeline of 4,466 BtR units and 7,910 PBSA beds. Overall, 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. 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.

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. 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 54.6 in December 2020 as compared to 54.7 in November 2020. It reflected a sustained rebound in business activity.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Watkin Jones Plc.

A Glimpse of Business Segments (FY20)

(Source: Company Website, chart created by Kalkine Group)

Financial and Operational Highlights (for the year ended 30 September 2020 (FY20), as on 19 January 2021)

(Source: Company Website)

• Despite the challenging period for the UK economy, the Company delivered a solid financial performance, with a robust gross margin.
• The revenue for FY20 decreased by 5.5% YoY to £354.1 million, due to delays to forward sales of developments (driven by Covid-19). This delay has slowed institutional clients’ activity and lower residential sales.
• However, Build to Rent (BtR) has shown good performance in FY20, with an increase in 21.4% YoY revenue. This increase was driven by completing the 159-apartment scheme in Bournemouth and good progress on several sites.
• Further, the Company obtained planning permission for 538 BtR apartments, which is for delivery in FY23, including 322 apartments in London and 216 apartments in Brighton and Hove.
• In Student accommodation division, the revenue declined by 8.2% YoY, but the gross margin was ahead of the previous year.
• The Company generated revenues from accommodation management of £7.6 million, which was broadly in line with the prior year. At the start of the 2021 financial year, Accommodation management division had 17,721 student beds across 64 schemes. This division is also moving to a single consumer brand.
• In 2020, the residential division achieved 95 sales, with revenues of £26.3 million in FY20. Moreover, it also delivered a solid performance from the residential division’s operations in the North West. Further, in the residential division, it has a future pipeline of approximately 745 homes and apartments.
• Basic earnings per share from continuing operations decreased to 8.2 pence as compared with the previous year (FY19: 15.2 pence). The adjusted basic earnings per share stood at 14.7 pence (excluding the exceptional items), which was down from the previous year (FY19: 16.1 pence).
• The Company witnessed a strong liquidity position, with £134.5 million of gross cash, £94.8 million of net cash and £100.0 million of revolving credit facility at 30 September 2020.
• The Board has proposed a full-year final dividend per share of 7.35 pence, which was in line with dividend policy.
• Overall, it has increased its development pipeline, with the scheduled completion of four BtR developments and the growth in the number of student beds for delivery in FY21.
• Further, it has shown a good start to FY21.

Financial Ratios

Share Price Performance Analysis

On 25 January 2021 (after the market closed), Watkin Jones PLC’s shares last traded at GBX 197.00, down by 0.51% against the previous day closing price. Stock 52-week High was GBX 299.50 and Low of GBX 118.17, respectively.

In the last six months, WJG’s stock price has delivered a positive return of +44.53% return as compared to +34.08% return of FTSE AIM UK 50 index and -6.24% return of FTSE All-Share Household Goods index, which shows that the stock has outperformed the benchmark index and the sector.

From the technical standpoint, 20-day SMA (188.20), and 20-day EMA (188.40) are supporting the upside potential.

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

Business Outlook Scenario

Watkin Jones delivered a robust financial performance in FY20 despite the ongoing Covid-19 disruptions. Moreover, it has significantly increased its development pipeline for the secured growth trajectory. 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. Therefore, the Company prospects are looking good, and it could provide decent value to investors in the long term. Overall, the Board looks confident of business prospects with favourable sector dynamic and investor demand.

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.

 (Source: Presentation, Company Website)

Considering the strong long term consumer demand for BtR and PBSA, resilient business model, solid financial performance, robust balance sheet position, proposed full-year dividend, sustainable business growth rate trajectory, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Watkin Jones at the closing market price of GBX 197.00 (as on 25 January 2021) with lower double-digit upside potential based on 15.59x Price/NTM Earnings (approx.) on FY21E 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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