- Forward sales of three sites since year-end and four more in negotiations.
- Institutional demand for build-to-rent very strong.
Annual results from Watkin Jones (WJG:203p), a developer specialising in purpose-built student accommodation (PBSA) and build-to-rent (BTR) housing, were slightly ahead of guidance given at the time of the pre-close trading update when I reiterated my buy advice, at 179p (‘Bagging a value stock hat trick’, 23 November 2020). Underlying operating profit dipped slightly to £51.7m on a 5 per cent lower revenue of £354m to produce earnings per share (EPS) of 14.7p. Net cash of £94.8m (37p a share) was almost £5m higher than expected, up more than a fifth year-on-year, and the board declared a 7.35p a share dividend.
Of far more interest is commentary from chief executive Richard Simpson who notes that institutional investors are returning to the market to forward fund developments. In the past three months, Watkin Jones has secured £65m of forward sales across three PBSA schemes (York, Bristol and Leicester) for handover in the 2022 financial year, and is in negotiations on a £35m sale of 462 bed site in Leicester to complete the forward funding of all 3,192 beds slated for delivery this year. Importantly, operating margins achieved are in line with pre-Covid-19 levels.
The group also segmented its secured forward 9,900 bed pipeline which has a gross development value (GDV) of £600m. Interestingly, university enrolments of ex-EU international students increased 9 per cent to a record 44,000 in the September 2020 intake despite Covid-19. UCAS applications overall were at record levels, the rising participation rate, and UK government target of achieving 600,000 international students by 2030, are supportive of demand for Watkin Jones’ student accommodation developments.
In the BTR division, Watkin Jones has forward sold all 857 apartments due for completion this year, secured a total pipeline of 4,713 units with a GDV of £900m, and has three sites with a GDV of £235m in negotiations. In the UK, total BTR investment increased 50 per cent to £4bn in 2020 including a record £1.43bn inflow in the third quarter (source: CBRE), highlighting strong institutional demand for the asset class. Watkin Jones sees potential to increase BTR annual output to 1,500 units within five years, up from 159 units in the 2019/20 financial year, as well maintaining PBSA completions at 3,000 beds.
Analysts at Progressive Equity Research are predicting current year EPS of 15.8p, rising to 17.4p in 2021/22 and pencil in respective dividends per share of 8p and 8.7p. On this basis, the shares are rated on a modest price/earnings ratio of 12.8 falling to 11.6 and offer an attractive prospective dividend yield of 4 and 4.3 per cent, respectively. Mr Simpson also notes that financial distress in the leisure, retail and office sectors will enable Watkin Jones to make opportunistic purchases of new sites at favourable prices, another bull point.
From a technical perspective, the shares have broken out of the 183p upper ceiling of the post stock market crash trading range as I predicted back in November. I have no reason to change my strong buy recommendation, nor my 240p to 250p target price. Strong buy.
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