Half-year results from Watkin Jones (WJG:230p), a construction company specialising in purpose-built student accommodation (PBSA) and private rented housing, highlight why the shares have produced an average annualised return of 35 per cent since IPO when I suggested buying into this highly cash-generative company ('A profitable education', 3 Apr 2016).
Adjusted half-year pre-tax profits rose by 10 per cent to £26m to deliver an 8 per cent increase in underlying EPS to 8.11p and supported an 11 per cent hike in the payout per share to 2.75p. Analysts at brokerage Pell Hunt expect a full-year payout per share of 8.1p covered two times by forecast EPS of 16.5p, while Paul Hill at Equity Development estimates Watkin Jones will produce an eye-catching 44 per cent ungeared return on equity from its asset-light business model this year.
UK Purpose built student accommodation (PBSA) offers an above-average yield profile compared with other mainstream property asset classes, strong and stable performance both in terms of investment yield and occupancy levels, and a relatively low-risk income stream with the ability to capture annual rental growth. This greatly appeals to institutional investors, which is why all 5,329 student beds Watkin Jones plans to deliver in the 2019 and 2020 financial years have been forward sold or are in the hands of solicitors. The group’s PBSA development pipeline of 9,100 beds across 20 sites is worth £850m and stretches out to 2022. Importantly, current supply of 639,000 PBSA beds in the UK (Jones Lang La Salle estimate) is well below the 750,000 intake of first year and international students, so new stock can be easily absorbed into the market. University applications for the 2019/20 academic year are on the up too, a reflection of the fact that the UK has 12 of the world's top 100 universities.
Watkin Jones is also growing its Build-to-Rent (BtR) activities and has now secured eight sites to construct 1,800 units for delivery in the next four years to meet institutional demand. Unibail, PSP, L&G, Aberdeen Standard, M&G, and Invesco are all increasing their exposure to this asset class, attracted by the UK’s ongoing population growth (the UK's population is forecast to grow by 7.5m by 2035), the urgent need for additional rented accommodation and attractive investment yields (4.25 per cent in prime regional sites). Watkin Jones’ board continues to explore the possibility of creating a separate investment vehicle to accelerate development of this business, acting as asset manager, and retaining a minority stake. Expect news on this front by the year-end.
With the benefits of a capital-light and forward-funded business model, analysts expect closing net funds of £90m (35p a share) by 30 September 2019, rising to £101m (39.5p) a year later. On this basis, the shares trade on a modest cash-adjusted PE ratio of 10 and offer an attractive prospective dividends yield of 4 per cent for the 2020 financial year. The shares are worth buying and I am raising my target price from 250p to 265p. Buy.
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