- Adjusted pre-tax profit slides 5 per cent to £48.8mn on revenue of £407mn in 2022
- Profit stated before one-off £30.4mn charge for potential costs of cladding safety work
- Flat profit performance expected in 2023
Watkin Jones (WJG:102p), a developer specialising in purpose-built student accommodation (PBSA) and build-to-rent (BTR) housing, reduced 2022 operating profit guidance by 10 per cent last autumn when two forward sales were pushed back to the new financial year due to the spike in market volatility. At the time, the directors also warned of weaker margins and pricing pressure as purchasers face higher funding costs (‘Margin pressure and market volatility hit Watkin Jones’, 4 October 2022).
Interest in forward sales is returning, although management cautions that new forward sales will be weighted to the second half of the 2023 financial year. The directors also note that gross margin of 16.6 per cent in 2022 is likely to fall to 12-14 per cent in the short term due to institutional investors facing higher financing costs. Sensibly, overheads are being closely monitored and a cost-saving plan is expected to deliver annualised savings of £3mn-£4mn.
Market opportunity
Despite the setback, the long-term fundamentals of both Watkin Jones’ markets remain robust, as highlighted by a £2bn forward pipeline, split equally across the two divisions.
Ownership of UK rented housing remains fragmented – only 1.7 per cent is owned by institutional investors – with high levels of occupancy, rent collection rates and attractive investment yields driving investor interest. Investment into BTR assets in the third quarter of 2022 was up 75 per cent year on year, with more than £5bn of investments being made in the 12-month period.
In the UK, the number of full-time students continues to grow steadily, a key determinant of demand for PBSA. The growth in non-EU applications means that the EU only provides 3 per cent of applications, so does not have a meaningful impact on overall demand for UK university places.
There is a long-term demand-supply imbalance for PBSA, too. This imbalance is expected to increase, with the predicted annual increase in the number of students exceeding the supply of new beds. Privately owned PBSA accounts for more than half of the 698,000 PBSA beds in the UK, but one quarter is unrefurbished, first-generation stock, built pre-1999. A number of these beds are reaching the end of their operational lives and will need replacing. However, only 24,600 new beds were delivered in the 2021-22 academic year, a modest 3 per cent rise on the prior year.
These dynamics explain why institutional investors remain attracted to UK PBSA as a mature, stable and income-producing asset class. Knight Frank reported £6.9bn of transactions in 2022, the highest investment volume on record.
Flat profits in 2023
Despite the strong fundamentals, the margin headwinds mean that analysts at Peel Hunt expect only modestly higher adjusted pre-tax profit of £50mn on 38 per cent higher revenue of £560mn this year. On this basis, expect earnings per share (EPS) of 15.2p and a slightly higher dividend of 7.5p a share. Current net cash of £83mn (32p) means that the business is well-funded.
So, although the shares are lowly rated on a price/earnings (PE) ratio of seven and a 7.2 per cent dividend yield makes them worth holding for the income, short-term capital upside looks limited. Hold.
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