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Watkin Jones on course for a record year

The specialist in purpose-built student accommodation has forward sold all of this year's budgeted sales
July 31, 2019

Watkin Jones (WJG:207.5p), a construction group specialising in purpose-built student accommodation (PBSA) and private rented housing, has issued a bullish development update and one that confirms that it is set to deliver all six PBSA schemes ahead of the start of the 2019/20 academic year.

Moreover, the group has exchanged contracts for the forward sale of a 197 bed PBSA scheme in Canterbury for £19.6m net of client funding costs, and completed the development funding agreement on a 245 bed scheme in Swansea. Both schemes are scheduled for completion ahead of the 2020/21 academic year. Analysts at brokerage Peel Hunt believe that Watkin Jones is now 90 per cent forward sold for the 2019/20 financial year, thus giving solid visibility that the business will be able to lift pre-tax profit from £52m to £56.6m and increase earnings per share (EPS) from 16.5p to 18.2p in the 12 months to the end of September 2020.

So, as forward-funded developments complete, the cash pile is set to rise strongly. Analyst Paul Hill at Equity Development predicts net cash of £90.4m (35.4p) at the September 2019 year-end, rising to £101.3m (39.6p) in September 2020. On this basis, the shares are being priced on a cash-adjusted price/earnings (PE) ratio of 10.3, falling to nine for the 2019/20 financial year. The cash build underpins a progressive dividend, with analysts at brokerage Peel Hunt predicting a payout of 8.1p a share this year, rising to as high as 9p in 2020, implying prospective dividend yields of 4 per cent and 4.5 per cent, respectively.

The PBSA pipeline is building, too, and includes a recently secured 12-storey PBSA development site in Leicester that will be home to 462 students and is earmarked for delivery ahead of the start of the 2021/22 academic year. The site is adjacent to a 601 bed scheme that Watkin Jones delivered in 2016. Importantly, the 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 continues to grow its Build-to-Rent (BtR) activities, too, recently securing two sites, one in Brighton & Hove and another in Leicester that will deliver a total of 370 BtR units. This means that it has now secured 10 sites to construct 2,170 units for delivery in the next four years. L&G, Aberdeen Standard, M&G, and Invesco are just some of the institutional investors increasing their exposure to the asset class, attracted by the UK’s ongoing population growth, the need for additional rented accommodation and attractive investment yields (4.25 per cent in prime regional sites).

Although the shares have more than doubled since I first suggested buying them at 100p at the IPO ('A profitable education', 3 Apr 2016), and the board has also paid out 20.95p a share of dividends to produce a total return of 128 per cent on the holding, the share price has drifted 8.5 per cent net of dividends received since I covered the half-year results (Watkin Jones primed for highly profitable growth’, 21 May 2019). I would stress that this has nothing to do with the group’s strong operational performance, but it is down to the beleaguered Woodford Investment Funds selling down a 13 per cent stake to raise cash to meet client redemptions. Importantly, I understand from my contacts that the Woodford stock overhang has now completely cleared, one reason why Watkin Jones’ shares could be primed for a rally back to their February 2019 highs of 233p, and well beyond. The other reason for a rerating is that the shares are very undervalued on several measures.

For example, the current year enterprise value to operating profit multiple of 8.7 times is only one point higher than the sector average, according to Mr Hill at Equity Development, even though Watkin Jones produced an eye-catching 44 per cent ungeared return on equity from its asset-light business model last financial year, the highest return in the sector. In addition, the shares are priced on an unwarranted discount to analysts’ sum-of-the parts valuations (250p to 265p) if you value the PBSA, BtR and student accommodation management businesses separately and then factor in the cash pile. Indeed, at the current offer price of 207.5p, the BtR operation is effectively being attributed a valuation of just three times divisional 2021 operating profit estimates, according to analysts at Jefferies, a bargain basement valuation that is completely at odds with the division's strong trading prospects.

So, ahead of what promises to be a bullish pre-close trading in late October, and offering potentially 28 per cent upside to my 265p target price, it’s well worth taking advantage of the technical drift in the share price since the half-year results. Buy.

 

■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.