Watkin Jones Plc – Operating with a strong cash position

Watkin Jones Plc (LON: WJG) is a FTSE AIM UK 50 index listed Property Development Company, which provides solutions related to the developments of multi-occupancy accommodation projects with a focus on the ‘student accommodation’ and ‘build to rent’ market.

Rationale for Valuation – Hold at GBX 186.40

• The Company has completed seven schemes and made good progress in growing the development pipeline, which will deliver returns in the future.
• The Company witnessed a strong second-half recovery and has an intention to pay a 2020 full-year dividend, reflecting the robust cash position.
• The Company has decent fundamental metrics as it has maintained a ROE above 10% for the last three years.
• As per valuation metrics, Price/Earnings, EV/EBITDA, EV/Sales and Price/Cash Flow multiples of the WJG are currently lower as compared to the corresponding multiples of the Real Estate Operations industry.
• From the technical standpoint, shares were trading well above the short-term support level of 20-day (around GBX 153.9) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• Failure to comply with legislation or secure adequate capital requirements can significantly affect the growth prospects of the Company.
• Moreover, the delay in project deliveries can impose penalties or fines and can cause reputation damage to the organisation.
• The macro-economic volatility can significantly impact the real estate market and consumer confidence.

FY20 Trading Update (for the year ended 30 September 2020, as on 6 November 2020)

• Despite lockdown restrictions, the Company delivered a resilient financial and operational performance, with seven developments successfully and three more expected to be secured shortly.
• In the second half of 2020, the Company has secured nine new development.
• The Company witnessed strong second-half recovery, with revenues of approximately £350.0 million and adjusted operating profit in the range of £48-£50 million in 2020.
• For 2020 year-end, WJG expects a gross cash balance of approximately £130 and a net cash balance of £90 million (after deducting £40.0 million of site-specific loans).

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company has shown a strong second half to the year and made excellent progress in growing development pipeline. In FY20, the Company delivered a resilient financial and operational performance, supported by strong cash generation. Moreover, it has a robust and capital-light business model, which could play a vital role in the sustainable growth of the business. In the forward sale markets, the activity in the institutional has started to recover in the latter part of 2020. 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. Overall, the Company prospects are looking good, and it could provide decent value to investors in the long term. The stock made a 52-week low and high of GBX 118.17 and GBX 299.50, respectively.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance on Watkin Jones at the closing price of GBX 186.40 (as on 23 November 2020) and will recommend fresh buying at the right time.

Somero Enterprises Inc

Somero Enterprises Inc (LON: SOM) is a manufacturer and distributor of laser-guided equipment. It provides concrete-levelling equipment, training, education, and support to customers in more than 90 countries.

In January 2021, the Company expects to provide a further update on FY20.

Rationale for Valuation – Hold at GBX 280.00

• The Company has shown a positive momentum heading towards year-end, with revised guidance on the higher side.
• The Company will also deliver healthy profits and cash flows to the shareholders.
• SOM has delivered a substantial return for the shareholders’ as return on equity (ROE) of 10.2% was higher as compared to the industry median. The ROE recorded by the Company in the past three years was considerably above the industry average.
• The debt/equity ratio recorded by the Company in the past three years was considerably below the industry median. In H1 FY20, the debt/equity ratio was 0.01x.
• As per valuation metrics, EV/EBITDA and Price/Earnings multiples of the SOM are currently lower as compared to the corresponding multiples of the Industrials industry.
• From the technical standpoint, shares were trading well above the short-term support level of 100-day (GBX 238.99) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The Company is facing some direct impact on demand from the coronavirus (COVID-19) outbreak.
• The next phase of lockdown due to the second wave of COVID-19 outbreak could result in lower demand, a shortage of labour and shut down of operations.

Trading Update (for the current financial year, ending 31 December 2020, as on 19 November 2020)

• The Company witnessed a positive trading momentum in the second half of 2020 (till the date (19 November 2020)), with an increase in reinstated guidance for FY20.
• The improved performance was due to strong contributions from new products (particularly the SRS-4 and the launched Broom + CureTM), healthy trading in an active US market and an increase in SkyScreed revenues.
• In H2 FY20, the Company has shown a strong cash generation, with healthy cash collections and effective working capital management.
• Overall, the performance was tracking in line with previous expectations.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company expects a strong, profitable trading and healthy cash generation in the second half of 2020. Based on this, it expects that the annual revenues will be around US$80 million, ending net cash will be US$ 26 million and adjusted EBITDA at around US$21 million in FY20. It witnessed an encouraging sign in the two largest markets (Europe and the US), which will provide a degree of confidence. The Company continues to trade in line with the management's expectations, with healthy cash collections. The stock made a 52-week low and high of GBX 140.00 and GBX 307.92, respectively.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance on Somero Enterprises Inc at the closing price of GBX 280.00 (as on 23 November 2020) and will recommend fresh buying at the right time.

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

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

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