Watkin Jones PLC (LON: WJG) – Decent financial performance driven by continued operational resilience.

Watkin Jones PLC is an FTSE AIM All-Share index listed Property Development Company founded in 1971. It provides solutions related to the development of multi-occupancy accommodation projects focusing on the “student accommodation” and “build to rent” markets. It operates across the entire development lifecycle from procurement, planning, construction to final scheme management. The Company has four segments, namely Purpose Built Student Accommodation (PBSA), Build to Rent (BtR), Residential, and Accommodation Management. Currently, it is the United Kingdom’s leading developer and manager of residential rental properties. The FPG (Fresh Property Group) is their accommodation manager, which manages approximately 18,000 student beds on behalf of institutional clients. WJG’s approach is built around three pillars: future places, future people and future planet.  

Recent trend of dividend payments – WJG declared an interim dividend of GBX 2.60 per share for H1 FY2021 on 18 May 2021 with an ex-dividend date of 10 June 2021. The dividend would be paid on 30 June 2021. Previously, the Company had paid a final dividend of GBX 7.35 per share for FY2020.

Growth Drivers

• Maximum rise in UK house prices since 2004: House prices in the UK surged by 13.4% YoY in June 2021, the highest since 2004. It even rose 0.7% over May 2021. It is partially driven by the coronavirus emergency tax break introduced in FY2020. The strong demand is expected to sustain while the coronavirus emergency tax break continues. The price increase is also driven by lack of supply, increasing consumer confidence and low borrowing costs.
• Residential-for-rent model being resilient: After a short disruption, consumer confidence and investment has returned to Purpose Built Student Accommodation (PBSA). Also, Build to Rent (BtR) faces increasing consumer and institutional appetite. Hence, WJG could take advantage of the longstanding shortage of affordable housing to drive its growth.
• Predictability of rental income: Once the economy fully rebounds, there is the predictability of rental income from Build to Rent (BtR). Already there was a 95% average rent collection during March 2020 to January 2021 period. Hence, there was a record Q1 FY2021 investment in BtR of £1.2 billion.
• Long-term consumer demand for PBSA: There is continued supply-demand imbalance in the student accommodation market, with demand exceeding supply. A majority of tenants are satisfied with the handling of the pandemic in PBSA. Furthermore, total 2021 UK student applications rose by 8.5%, partially driven by the UK government’s commitment to growing international student numbers.
• Third party accommodation management:  The FPG (Fresh Property Group) is WJG’s accommodation manager. Using this third party management model, WJG remains largely insulated from full Covid-19 impact, and its client experience during the pandemic strengthened WJG’s reputation.

(Source: Company Presentation)

Key Risks

• Cyclicality of Real Estate Sector: The real estate sector is cyclical. Hence, muted consumer confidence during an economic downturn could impact the demand, margin and liquidity of WJG.
• Competitive Environment: WJG operates in a highly competitive environment. Increased competition could surge land prices and hence, property development costs, potentially impacting margins.
• Disruption in regions: The Company operates in the UK, and hence, there are disruption challenges in some regions due to Covid-19.
• Delay in Project Deliveries: Any delay in the delivery of a project could lead to reputational damage for WJG. It also could lead to the imposition of fines or penalties.
• Financial Risk: Any failure to secure the adequate capital requirement could significantly affect the growth prospects of WJG.
  

Now, we will analyze some key fundamental and shareholders statistics of Watkin Jones PLC.

Financial and Operational Highlights (for the six months ended 31 March 2021 as of 18 May 2021)

(Source: LSE Website)

• Despite increasing investor confidence in WJG’s market sectors and further progress in securing new forward sales, revenue in H1 FY2021 was down by 3.9% YoY.
• As per the revenue share, BtR contributed 33% of revenue in H1 FY2021, displaying its rising importance.
• The fall in revenue led to gross profit, EBITDA and basic earnings per share down YoY by 2.3%, 2.5% and 4.1%, respectively.
• However, WJG maintained solid margins, with gross margin at 23.2% and net margin at 11.6% in H1 FY2021.
• All construction activities remained on track, and it boosted the development pipeline.
• The fundamentals for student accommodation assets and built to rent remained robust with growing institutional demand.
• WJG’s cash-accretive operations resulted in cash position surging to £88.7 million in H1 FY2021 from £72.4 million in H1 FY2020.
• This strong liquidity position led the management to offer an interim dividend per share of GBX 2.60 in H1 FY2021, while it did not offer any interim dividend in H1 FY2020.

Financial Ratios (H1 FY21)

 Share Price Performance Analysis

(Research done by Kalkine Group)

On 29 June 2021, at 7:15 AM GMT, WJG’s shares were trading at GBX 214.00, down by 0.23% against the previous day closing price. Stock 52-week High and Low were GBX 248.00 and GBX 125.92, respectively.

On a daily chart, WJG's price is sustaining above 200-day EMA of about GBX 202.80, indicating the possibility of an upward movement. The momentum indicator RSI (14-period) is trading at ~44.39 level and is moving towards the oversold zone. The MACD line is trading below the centreline, however, forming a positive crossover with the signal line.

In the last year, WJG’s stock price has delivered a decent positive return of ~42.05%. It has outperformed the FTSE All-Share Household Goods and Home Construction index with a return of around 1.89% and the FTSE AIM All-Share index with a return of about 41.68%.

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

Peers used in the valuation methodology (Price/NTM Earnings) 

Business Outlook Scenario

WJG delivered a robust financial performance in H1 FY2021 despite the ongoing Covid-19 disruptions. Moreover, it has significantly increased its development pipeline for the secured growth trajectory. Furthermore, it has a robust and capital-light business model, which could play a vital role in the sustainable growth of the business. The Company is driven by the maximum rise in UK house prices since 2004, resilient residential-for-rent model, predictable rental income, long-term consumer demand for Purpose Built Student Accommodation (PBSA) and third party accommodation management model going into H2 FY2021. 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. The management also has enough confidence in WJG’s prospects that it offered an interim dividend per share of GBX 2.60 in H1 FY2021, while it did not offer any interim dividend in H1 FY2020.

The board anticipates further growth in FY2021 driven by the Company’s development pipeline, operational capabilities and financial strength. On the technical chart, the next important support level is at GBX 189.00.

Based on the decent performance in H1 FY2021, solid long-term demand for PBSA and BtR, decent growth prospects, resilient business model, the better liquidity position of the Company than the industry, and support from valuation as done using the above method, we have given a “Speculative Buy” recommendation on Watkin Jones Plc at the current market price of GBX 214.00 (as on 29 June 2021 at 7.15 AM GMT), with a lower double-digit upside potential based on 14.41x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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

*The dividend yield is subject to change as per the stock price movement.

*The reference data in this report has been partly sourced from REFINITIV

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