Watkin Jones (WJG:213.5p), a construction company specialising in purpose-built student and private rented sector (PRS) accommodation, has made a raft of important announcements.
Firstly, the company has appointed Richard Simpson, the property director of Unite (UTG:854p), the FTSE 250 manager of purpose- built student accommodation, as new chief executive. It’s a real coup and he is an able successor to Mark Watkin Jones who will be stepping down from the position at the year-end. His family still retain a hefty 27.6 per cent stake in the company, having floated the shares at 100p when I first suggested buying in ('A profitable education', 3 Apr 2016).
Secondly, the company has entered into a development arrangement with M&G and Lochailort to deliver a 315 apartment build-to-rent (BTR) scheme in Reading. Fully funded by the new investors, works start shortly on the £68.5m project and completion is slated for 2021. Watkin Jones is targeting the delivery of 1,500 new BTR units across five schemes by 2023, and has several more in negotiation, to take advantage of increasing demand for an asset class offering net initial yields of around 3.8 per cent, and prospects of rental growth, to pension funds and institutional investors. Property experts estimate that the number of UK households in rental accommodation could hit 6m by 2025, representing a 100 per cent increase since 2007. The directors are now exploring the possibility of establishing a new listed vehicle (to be managed by Watkin Jones) that will acquire its BTR projects on a forward funded basis. It would take a minority stake to benefit from the investment upside, while maximising returns for its own shareholders.
Thirdly, Watkin Jones has a bumper pipeline of 25 student accommodation projects with a development value in excess of £900m that will deliver 10,300 student beds by 2022. All 3,415 beds scheduled for delivery in the 12 months to the end of September 2018 have been forward sold, and so too have all bar 478 of the 2,723 beds slated for delivery the following year. Moreover, all seven sites (3,000 beds) for the 2020 financial year have been secured, and one has already been forward sold.
The robust development pipeline is highly supportive of analysts’ expectations that point to the company delivering EPS of 15.4p this year, rising to over 16p in 2019, to underpin 10 per cent hikes in the dividend per share to 7.3p and 8p, respectively. Net funds more than trebled to £38.4m year on year and with cash flowing in from developments then expect a year-end figure close to £75m, or 29.5p a share. On this basis, the shares are priced on 11.5 times 2019 cash-adjusted EPS, and offer a 3.7 per cent prospective dividend yield. That’s value in my book. So, having rated them a buy at 190p ahead of the results (‘Hitting pay dirt’, 9 Apr 2018), I maintain that view and introduce a new target price of 250p. Buy.
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Simon's second book Stock Picking for Profit has now been reprinted and is available to purchase online at www.ypdbooks.com for £16.95, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order.
