Watkin Jones (WJG:203p), a construction company specialising in purpose-built student accommodation (PBSA) and private rented housing, has made strong operational progress since the interim results (‘Watkin Jones building up’, 24 May 2018).
The company has just announced the forward sale of a portfolio of four PBSA schemes for £180m, net of all client funding and acquisition costs, payable over the next two years. The portfolio consists of 2,163 student beds located in Glasgow, London and Coventry. The purchaser also has the option of acquiring a 348-bed PBSA scheme in Bristol that is currently going through the planning process. The forward sale structure creates a more regular and consistent cash flow for Watkin Jones, as the end purchaser is billed on a monthly basis, as opposed to a non-forward-sold development where revenue is only received on sale of the asset post completion.
In addition, Watkin Jones has acquired a site in Wembley, London with planning consent for a 599-bed PBSA scheme, which will be developed for the start of the 2021-22 academic year. This takes the PBSA pipeline to 26 student accommodation projects with a development value in excess of £940m for delivery of 10,900 student beds by 2022.
The company has also entered into a development agreement with the vendor of the Wembley site to deliver 300 build-to-rent (BTR) flats on an adjoining site by March 2021. Watkin Jones is targeting delivery of 1,800 new BTR units across six schemes by 2023 to take advantage of strong institutional demand for an asset class offering net initial yields of 3.8 per cent and solid prospects of rental growth.
Despite forward sales underpinning expectations that pre-tax profits will rise by 10 per cent in both the 2018 and 2019 financial years, the shares are only rated on a cash-adjusted price/earnings (PE) ratio of 11 for the 12 months to end-September 2019 and offer a prospective dividend yield of 4 per cent. That’s attractive, which is why I rate the shares a buy ahead of the pre-close trading update, having initiated coverage around the 100p mark at the IPO ('A profitable education', 3 April 2016). Buy.
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