- First half pre-tax profit falls from £11.4mn to £0.3mn on a fifth lower revenue of £154mn
- Strong second half result expected but earnings downgrades
- Post period end disposal of 819 bed student scheme in Bristol
- Five further forward sales being marketed to investors
Watkin Jones (WJG:85p), a developer specialising in purpose-built student accommodation (PBSA) and build-to-rent (BTR) housing, produced a mixed bag of interim results.
The sharp reversal in operating profit, down from £14.6mn to £1.8mn, resulted mainly from previously highlighted pressure on gross margin (down from 15.5 to 10.4 per cent). This was due to build cost inflation and the incremental impact of additional build costs on a PBSA scheme in Exeter where the main contractor went into liquidation. Also, revenue earned in the period was derived from previously forward-funded sales, so the steep fall in reported profit was accentuated by the absence of chunky profits booked on new forward sales in the six-month period.
That said, alongside the results, the group announced the forward sale of its PBSA scheme in Bristol which will add £5mn to second-half operating profit and deliver a net cash receipt of £25mn. Moreover, management is in discussions on a further five forward sales, of which two are under offer, albeit the anticipated ‘materially stronger’ second half showing will be dependent on these deals completing.
Earnings downgrades
Although the forward funding market is recovering from last autumn’s turmoil, the directors are taking a cautious view in the short term and are not accelerating pipeline assets to the balance sheet in readiness for sale. This will result in £15mn of expected profit contribution being pushed back into the 2023/24 financial year.
Analysts at joint house broker Peel Hunt have chosen to reduce their estimates even further given the ongoing volatility in the market and execution risk for the said six assets in the market. In fact, they slashed their current year pre-tax profit estimate to £28mn, down from £49mn in the 2022 financial year, on the assumption that forward sales of only three of the six schemes being marketed as complete by the financial year-end.
On this basis, expect full-year earnings per share (EPS) of 8.5p and an annual dividend of 6.3p, down from 14.8p and 7.4p, respectively, in the 2022/23 financial year. This implies the shares are rated on a current year price/earnings (PE) ratio of 10 and offer a prospective dividend yield of 7.4 per cent. Importantly, Watkin Jones maintains a strong liquidity position, ending the first half with net cash of £45.3mn and total cash and available banking facilities of £158mn.
As noted at the start of the year (‘A construction firm yielding 7 per cent in a challenging market’, 25 January 2023), short-term share price upside looked limited in light of the challenging market environment. That is still the case. However, potential for a strong recovery in earnings in the 12 months to 30 September 2024 means that downside from this point should be limited, too.
For instance, analysts at Progressive Equity Research are maintaining their 2024 earnings expectations which point to pre-tax profit and EPS bouncing back strongly to £52.7mn and 15.4p, respectively. Peel Hunt are more cautious but still expect 32 per cent higher pre-tax profit of £37mn to produce EPS of 10.7p. Based on these estimates, the shares are rated on a modest 2024 forward PE ratio of 5.5 to 7.9 and offer material yield support, too. Hold.
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Please note that I will now be on annual leave until Thursday, 8 June 2023.
