Shares in Watkin Jones (WJG:225p), a construction company specialising in purpose-built student accommodation (PBSA) and private rented housing, have delivered a 10.7 per cent total return since my last update (‘Watkin Jones beds in outperformance’, 5 November 2018), helped by annual results that beat analysts’ earnings per share (EPS) expectations by 4 per cent.
It was difficult not to be impressed after the company boosted underlying pre-tax profits by 15.7 per cent to £50m on 20 per cent higher revenues of £363m, the key driver being the delivery of 10 PBSA developments and 3,415 student beds for the start of the 2018-19 academic year. Shareholders are rightly being rewarded with their share of the spoils as the 15 per cent hike in the payout per share to 7.6p matched the double-digit profit growth. The dividend is covered more than two times by EPS of 16p, and the progressive dividend policy is well underpinned by a doubling of net cash to £80m, a sum worth 31p a share.
Furthermore, almost all of the 2,723 beds slated for delivery in the 2019 financial year have already been forward sold, as have 70 per cent of the 2,606 beds scheduled for delivery in 2019-20. Today, Watkin Jones announced the forward sale of a £90m PBSA development of 599 beds in Wembley, North London that is scheduled for delivery for the start of the 2021/22 academic year. The bumper pipeline significantly de-risks earnings forecasts as does the 1,500 residential units the company plans to deliver across seven build-to-rent (BTR) developments by 2022. Demand here is being buoyed by strong institutional demand for an asset class offering net initial yields of 3.8 per cent and prospects of decent rental growth.
In addition, the company announced last week that it has acquired a primed development site in Woking town centre which has capacity of 350 BTR apartments with a targeted completion in 2024. The board is still considering the option of spinning off the BTR business into a new investment vehicle to enhance shareholder value.
Not that the company hasn’t already delivered significant shareholder value. The shares have risen by 124 per cent since I suggested buying around the 100p mark at the IPO ('A profitable education', 3 April 2016), and the board has now paid out dividends of 18.2p a share to produce a total return of 142 per cent in under three years. I expect the outperformance to continue. That’s because even if my conservative target price of 250p is hit then the shares will still only be rated on a cash-adjusted PE ratio of 13, hardly exacting for a highly cash generative company that’s set to deliver a return on equity well in excess of 25 per cent this year.
Please note that I have taken into account that finance director Philip Byrom sold 567,000 shares last week at 225p each for personal financial planning purposes. He retains 2.6m shares, equating to over one per cent of the issued share capital, and I am comfortable with the sale. Buy.
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