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Built for solid returns

A developer specialising in purpose-built student accommodation and build-to-rent boasts a £2bn development pipeline at a time when increasing numbers of institutional investors are targeting operational property assets as a hedge against inflation
Built for solid returns

•    Board confident of delivering 8 per cent higher annual pre-tax profit of £55mn
•    £20mn profit to be booked from this week’s forward sale of PBSA portfolio 
•    Development pipeline up 43 per cent to £2bn

Watkin Jones (WJG:233p), a developer specialising in purpose-built student accommodation (PBSA) and build-to-rent (BTR) housing, is on track to deliver record full-year results and materially higher profits in 2023.

The group’s development pipeline has risen 43 per cent to £2bn in the past 12 months, of which £0.6bn is already forward sold, thus offering investors solid visibility of revenue and earnings. For example, following the half-year end, Watkin Jones booked a £20mn profit on the sale of three PBSA sites which will also generate £200mn of revenue during construction over the 2023 and 2024 financial years. This highlights the attractions of the group’s asset-light business model whereby the investor funds the development, thus de-risking the investment case.

Moreover, the combination of rising tenant demand and rental expectations, as well as yield compression for high-quality income-producing assets, means that institutional investment flows into the UK residential market are forecast to hit £16.5bn this year, up from £10.2bn in 2021, according to Knight Frank. Ongoing growth in BTR is a key driver, hence why half of Watkin Jones' development pipeline is focused on this segment. It also explains why analysts at Progressive Equity Research expect gross profit from BTR activities to rise by more than half to £54mn in the 2022/23 financial year, surpassing the contribution from PBSA for the first time.

In turn, the greater contribution from BTR underpins analyst forecasts that suggest annual pre-tax profit will rise from £55mn to £75mn on 17 per cent higher revenue of £659mn in 2022/23. On this basis, expect both earnings per share (EPS) and dividend per share to rise by almost a third to 22.8p and 11.4p, respectively, implying the shares are currently rated on a forward price/earnings (PE) ratio of 10 and offer a prospective dividend yield of 4.9 per cent.

Bearing in mind the modest valuation, the supply-demand imbalance in the UK housing market is highly supportive of institutional demand for BTR assets remaining high for many years to come. That’s because 227,000 new residential rental properties are needed each year, or five times the actual number under construction, according to Capital Economics and Savills. Moreover, a decline in housing association investment and the exit of small buy-to-let landlords in the past 12 months are acerbating the housing shortage at a time when increasing numbers of institutional investors are targeting operational assets as a hedge against inflation.

True, the board has taken a £28mn one-off charge for potential fire safety remedial costs (over the next seven years) under new Building Safety Act, but it’s affordable at less than 25 per cent of year-end forecast net cash and draws a line under the issue. The 10 per cent share price fall since January (‘A high yielding low risk build to rent play’, 18 January 2022) is at odds with the operational progress being made and the solid earnings visibility. Buy.


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