- Share price falls a third on profit warning
- Analysts cut profit forecasts by a third for 2023 financial year
- EPS expected to flatline in 2023
- Net cash of £75mn (30p a share)
Shares in Watkin Jones (WJG:99p), a developer specialising in purpose-built student accommodation (PBSA) and build-to-rent (BTR) housing, lost a third of their value after the group missed 2022 operating profit estimates by 10 per cent and warned of both softness in margins as well as pricing pressure as purchasers face higher funding costs.
Two forward sales that were planned to close in September have been pushed back to the new financial year due to the spike in market volatility. So, although the trading performance in the second half was materially better than the first half, analysts at Progressive Equity Research have downgraded their pre-tax profit estimates by 10 per cent to £49mn on revenue of £421mn (down from £561mn previously forecast) for the 12 months to 30 September 2022.
They have also slashed their forecasts for the 2022/23 financial year, cutting their revenue estimates by £114mn to £545mn, trimming BTR profit margins from 17 to 13 per cent, and increasing administration costs by £2.6mn, the overall effect of which is a 33 per cent downgrade in group pre-tax profit estimates to £50mn. On this basis, expect flat earnings per share of 15.8p and a dividend of 7.9p a share (down from 8.7p forecast in 2022) implying the shares are rated on a forward price/earnings (PE) ratio of 6.3 and offer an 8 per cent prospective dividend yield. Closing net cash of £75mn (30p a share) now accounts for 30 per cent of the group’s market capitalisation.
There is no glossing over the scale of the profit downgrade, and understandably investors are taking a cautious stance, selling the shares down to their 100p IPO price. But equally the long-term fundamentals support both asset classes, driven by rising tenant demand and attractive income characteristics for institutional investors. Also, forward sales still account for half of revised 2023 revenue estimates, offering a degree of visibility even though earnings risk is now greater in a more challenging trading environment. Hold.
Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.
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