- First-half revenue up 14 per cent to £175mn
- Underlying operating profit up 122 per cent to £4mn
- Adjusted pre-tax up 11-fold to £3.4mn
- Net cash edges down to £44mn
Purpose-built student accommodation (PBSA) and build-to-rent (BTR) housing developer Watkin Jones (WJG:50p) has returned to profit after enduring an annus horribilis in 2023.
The sharp rise in revenue mainly reflects the delivery of previously sold developments as well as the forward sale in March 2024 of a PBSA block in Bristol. This helped drive up the PBSA division’s gross profit from £4.8mn to £7.1mn to account for almost four-fifths of the group total. Reassuringly build cost inflation continues to moderate and all current development schemes are on track. In addition, the group has secured two new PBSA sites for development and submitted planning applications for 3,000 beds across four schemes.
Having completed one forward-funded deal in the first half of the financial year, Watkin Jones has another one in the legal process and is actively marketing other schemes, too. Around £150mn of the group’s contractually secure forward-sold revenue of £400mn is due for delivery in the second half of the year. It includes a growing contribution from the BTR unit, which increased first-half gross profit by 12 per cent to £9.3mn, or half the group total, as previously sold forward-sold developments reached completion.
Share price recovery could take time
A major headwind faced by the business has been the impact of higher interest rates and economic uncertainty on the investment market as institutions wait on the sidelines. It’s therefore good news that the UK economy has emerged from recession with stronger than expected GDP growth in the first quarter of 2024. The flipside is that a slower pace of interest rate cuts than previously anticipated has the potential to impact the pace of recovery in the forward funding market that Watkin Jones’ business model is dependent on.
So, having previously guided investors to expect operating profit of £15mn-£20mn this year, the board is now guiding shareholders to expect “at least £15mn”. In response, joint house broker Peel Hunt trimmed its pre-tax profit estimate from £15mn to £13mn, but analysts are maintaining their £20.5mn forecast for the following year. On this basis, expect earnings per share (EPS) of 4.8p and 7.2p, respectively, implying the shares are rated on prospective price/earnings (PE) ratios of 10.4 (2024) and 6.9 (2025). Although the net cash position is healthy and the group has £103mn of total cash and available bank facilities, Peel Hunt doesn’t expect a dividend to be paid this year.
The shares have flatlined since I rated them a hold at the current price at the start of the year, a reflection that investors need to first see earnings recover before having their confidence restored. Hold.
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