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Watkin Jones Plc

Watkin Jones Plc Forecast visibility increases further

Watkin Jones plc (LON:WJG), a leading UK developer and constructor of multi occupancy property assets, with a focus on the student accommodation sector, is pleased to provide the following update on a number of its developments.

Additional forward sale

The Group announces that it has forward sold the student accommodation element of its Duncan House development in Stratford High Street, E15 to an institutional investor for an undisclosed fee. This forward sale follows on from the announcement in June 2016 that the Group had received planning consent to progress with the redevelopment of the site. The proposed redevelopment consists of 511 beds of student accommodation (420 ensuite clusters and 91 self-contained studios); 44 residential dwellings including a proportion of affordable housing in a mix of 1, 2 and 3 bedroom units; a new education facility with 3,150m2 gross internal floor area (‘GIA’), and 688m2 GIA of affordable business workspace. The residential units and academic floor space that form part of the wider scheme will be sold in separate transactions by Watkin Jones. The total gross development value of the scheme is in excess of £100million. Demolition work has started on site and the development is anticipated to be completed in the summer of 2019, ahead of the 2019-2020 academic year.

Planning consents

Watkin Jones also announces that it has received planning consents for three developments, two in Aberdeen and one in Sheffield. The Aberdeen schemes include the redevelopment of Pittodrie Street, which is in close proximity to Aberdeen University, providing 618 beds of student accommodation and Caledon House, which is situated in a prime location opposite Robert Gordon University and will provide 199 beds of student accommodation (147 ensuite clusters and 52 self-contained studios). Caledon House is scheduled to be completed in the summer of 2018, ahead of the 2018-19 academic year, whilst the Pittodrie Street development is expected to be completed in the summer of 2019, ahead of the 2019-20 academic year. The development in Sheffield is located in Rockingham Street, in close proximity to the University of Sheffield, and will provide 543 beds of student accommodation (457 ensuite clusters, 69 self-contained studios and 17 one bed apartments) as well as two commercial units totalling approximately 4,340 square feet. Rockingham Street is due for delivery in the summer of 2018, ahead of the 2018-19 academic year.

Completed scheme sale

Furthermore, the Group is pleased to announce that its Athena Hall development in Ipswich has now been sold for an undisclosed amount to Arlington Investors Limited (“Arlington”). Situated on the Quayside in Ipswich, Athena Hall services the University of Suffolk and comprises 590 student beds. Built by Watkin Jones, the development was completed in 2010 and has since been held and operated in a joint venture arrangement. Athena Hall has been managed by Fresh Student Living Limited (“Fresh”), a wholly owned subsidiary of the Group, and Fresh will continue to manage the asset for Arlington.

Mark Watkin Jones, Chief Executive Officer of Watkin Jones plc, said: “It is very pleasing to provide such a positive update on a number of our developments, all at different stages of their life cycle. The planning consents granted for Pittodrie Street and Caledon House are exciting as Aberdeen is an important contributor to the knowledge economy in Scotland, with two universities and approximately 21,000 full time students, and there is a recognised need for purpose built student accommodation in the city. The redevelopment of Rockingham Street in Sheffield provides us with an opportunity to further extend our reach in this important University city.

“With the forward sale of the student accommodation development at Duncan House now completed we can concentrate on the construction phase of this significant development, which will serve the University of London when completed in the summer of 2019. We expect the Duncan House development to make an important contribution to our earnings over the next three years.

“The Group’s share of net funds from the sale of Athena Hall will add to our cash position and through Fresh we will have the added benefit of continuing to manage the asset going forward.”

Zeus Capital said:

The announcement that the Duncan House scheme in Stratford, London has been forward sold increases visibility on gross profit coming from the Student Accommodation division in FY17 up towards c. 70%. Whilst its contribution in the current year is relatively small its importance to FY18 and into FY19 increases significantly as the project is built out. Three planning consents have also been obtained two of which are on developments that hadn’t been secured at the time of the IPO. We leave forecasts unchanged but acknowledge that forecast risk continues to reduce in FY17 and importantly into FY18 as new sites are secured, gain planning approval and sold. Since coming to market earlier this year (23rd March) Watkin Jones has executed in line with its strategy having already announced (17th November) that FY16 results, due in mid-January, are in line with expectations and improving forecast visibility through the announcement of five forward sales and six planning consents. The current valuation is appealing with the shares trading on a single digit FY17 PER of 8.6x and yielding 5.3%

Development of pipeline reinforces forecast certainty: Gaining planning consent for the Pittodrie Street development is important as it is significant in revenue terms. However, it had already been secured at the time of the IPO. Importantly, the other planning consent in Aberdeen and the one in Sheffield had not been secured and therefore increase certainty on the element of forecasts on which we had no visibility at the time of the IPO. The build out of the longer term pipeline is reinforced by forward sale announcements that materially increase near term forecast certainty. It should also be stressed that Fresh Student Living has good earnings and is growing strongly (c.45% growth in beds in academic year 16/17) adding to the visibility on overall group gross profit.

Investment market remains good: After a strong 2015 investment volumes in Student Accommodation for 2016 will be in the region of c.£3bn. This looks set to continue with several major deals expected to close early in 2017. In the 12 months to end of Q3, CBRE estimate that PBSA once again outperformed the IPD with a total return of 10.2% due to both rental growth and yield compression highlighting the attractiveness of the sector to investors.

Valuation not reflective of forecast certainty: We continue to believe the shares are undervalued given the high levels of earnings visibility that the forward sales model generates, the low leverage risk with in excess of £30m of net cash forecast and the structural growth in both Purpose Built Student Accommodation (PBSA) and the Private Rented Sector (PRS). On FY17 earnings, on which we already have high visibility less than a quarter of the way into the year, the shares trade on 8.6x. and yield a prospective 5.3%, twice covered by earnings and underpinned by a strong balance sheet. A 12x PER multiple on FY17 earnings would equate to c. 160p, offering c.36% upside.

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