- 2023 pre-tax loss of £42.5mn dogged by one-off costs
- Operating profit of £15mn-£20mn forecast in 2024
- Forward PE ratio of 9.4 (2024)
Annual results from Watkin Jones (WJG:50p), a developer specialising in purpose-built student accommodation (PBSA) and build-to-rent (BTR) housing, were in line with guidance at the pre-close trading update in October. It still didn’t make for comfortable reading.
The group’s full-year reported pre-tax loss of £42.5mn included £39.6mn of exceptional charges including £35mn for building safety remedial works, £3.1mn of restructuring costs (mainly headcount) and £1.5mn of additional exceptional interest costs. Adjust for one-off items, and the group plunged from an underlying profit before tax of £48.8mn in the 2022 financial year to a loss of £2.9mn on 2 per cent higher revenue of £413mn.
Adjusted operating profit of £0.2mn reflected low levels of forward sales, lower margin earned across the group’s schemes, additional costs incurred to complete two schemes, and a third-party contractor insolvency. The group also booked a £5.5mn impairment charge on land assets that are no longer commercially viable and a £4.6mn book loss on the sale of three private rental schemes. Watkin Jones’ net cash before lease liabilities weakened, too, down from £82.6mn to £43.9mn, and the final dividend was axed.
The turmoil in the business that led to the record operating loss also resulted in the exit of former chief executive Richard Simpson last summer. He has since been replaced by chief investment officer Alex Pease on a permanent basis.
One of the major issues faced by the group has been the impact of higher interest rates and economic uncertainty on the investment market as institutions waited on the sidelines. It’s therefore reassuring to hear that “the forward funding market is showing early signs of recovery as interest rates stabilise”. Although a downward move in interest rates will be needed to drive higher investor demand, this is not an unrealistic possibility.
Moreover, management is looking at every aspect of the business to try to optimise levels of profitability and performance. For instance, the directors are aiming to leverage the group’s expertise by offering to refurbish third-party property into efficient fire-safety buildings to drive up development profit. They are also looking to partner with capital provides on land with existing planning consent, the benefit of which is that it brings developments forward and lowers risk, too.
Looking for positives
Another positive for investors is that £300mn of previously sold developments cover the group’s cost base for the 2024 financial year to drive up profitability. The directors are guiding shareholders to expect an operating profit of £15mn-£20mn in the 12 months to 30 September 2024.
An operating margin below 5 per cent is still well below the 13.4 per cent earned in the 2022 financial year, but it’s an improvement. On this basis, analysts at Progressive Equity Research pencil in pre-tax profit of £11.5mn on revenue of £413mn, earnings per share (EPS) of 3.4p and a small dividend of 1.7p a share.
Joint house broker Peel Hunt is more bullish, forecasting pre-tax profit of £15mn (2024) and £20.5mn (2025). So, not only are its EPS estimates of 5.3p (2024) and 7.2p (2025) higher, but the same is true of the dividend shareholders can expect. Based on a 50 per cent payout ratio, Peel Hunt pencils in dividends per share of 2.6p and 3.6p, respectively. On this basis, the forward price/earnings (PE) ratios are 9.4 (2024) and 6.8 (2025) and the shares offer prospective dividend yields of 5.2 per cent and 7.2 per cent.
Given the poor performance in the past 12 months, investors will need to see Watkin Jones deliver a strong earnings recovery to restore their confidence and credibility in the management team. That is going to take time. Hold.
■ Special offer. Simon Thompson's books Successful Stock Picking Strategies and Stock Picking for Profit can be purchased online at www.ypdbooks.com at the special discounted price of £5 per book plus UK P&P of £4.95, or £10 for both books plus UK P&P of £5.75, subject to stock availability.
They include case studies of his market beating Bargain Share Portfolio companies outlining the characteristics that made them successful investments. Simon also highlights other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Full details of the books’ content can be viewed on www.ypdbooks.com
