Watkin Jones plc (LON:WJG), a leading UK developer and constructor of multi occupancy property assets, with a focus on the student accommodation sector, announced today its maiden annual results for the year ended 30 September 2016. The Board is pleased to report a successful financial year with trading in line with its expectations.
Zeus Capital said:
FY16 results show a strong performance with 9.3% increase in revenue to £267.0m leading to a 23% increase in profitability as adj PBT increased to £40.2m (FY15 £32.8m). The 220bp improvement in gross margin underpinned the increase in profitability as legacy low margin projects continued to fall out of the mix. The 20.2% gross margin was ahead of the 19.5% forecast and in line with Group’s target of generating a through the cycle 20% margin. The forward sale announcements of five developments since the year end provide an increasing level of visibility on both FY17 and FY18, we estimate c. 70% of FY17 gross profit is currently derived from forward sold projects. The announcement on Duncan Road Stratford means the forward sold pipeline is already building into FY19. Current valuation does not reflect the forecast certainty with the shares trading on 9.0x FY17 earnings and yielding a prospective 5.1%.
* Good progress in FY16 increases certainty in outer forecast years: Ten student developments gained planning permission during FY16 with two announced post the float (March 23rd 2016). Since the year end a further four have gained consent. Importantly, the levels of forward sales have also been high with eight sold during the year and five since the year end, underpinning confidence in Watkin Jones’ forward sales model. Across the forecast period, Watkin Jones has currently secured c. 9,500 beds across 27 sites. 61.6% of these beds have been forward sold and including beds that have planning consent this figure increases to 87.2%. Assuming an annual delivery of 3,500, securing a further 1,000 beds for delivery in FY19 would mean visibility on 100% of the beds due for completion across the forecast period. Current forecasts are predicated on 70% of Student Accommodation revenue having been forward sold despite being less than four months into the financial year providing a high level of certainty on the FY17 outcome.
* Investment market remains good: The fundamental Student Accommodation market remains sound from both an investment and operational perspective. CBRE forecast c.£3.0bn of investment volumes in 2016, the second highest on record, and average rent in the sector increasing 1.9% whilst yields tightened 25-40bps. As a result, the sector materially outperformed the IPD Index once again in 2016.
* 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 at the year end 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 with 70% of gross profit forward sold, the shares trade on 9.0x. and yield a prospective 5.1%. Applying a 12x PER multiple on FY17 earnings would equate to c. 160p, offering c.30% upside.
Commenting on the results, M W Jones, Chief Executive Officer of Watkin Jones Plc, said: “This has been a transformational year for the Group and we are delighted to report such a strong set of maiden full year results, which have seen positive movements across our key financial metrics. Our student accommodation development business is robust. It is positively underpinned by a buoyant market and our forward sale model provides us with excellent visibility as to future earnings and cash flow. We currently have a development pipeline of 9,469 beds across 27 sites, where we have planning permissions granted for 8,260 beds. Nine of the ten schemes scheduled for completion in FY 2017 have been successfully forward sold and the tenth scheme is in legal negotiations. All schemes are progressing well on site.
At 30 September 2016, Fresh Student Living, our specialist student accommodation asset management business, was contracted to manage 12,337 beds across 44 schemes.
By utilising positive market conditions and choosing only the best opportunities, we expect to make further progress in our student accommodation businesses.
As we near completion of our first PRS development in Leeds, we are looking, while always being mindful of the need to expand in a sustainable way, to build on our expertise and our institutional relationships to develop real momentum in the PRS market and we are looking at a number of exciting opportunities.
In private residential development, our approach is to utilise our existing land bank and to acquire further sites when suitable opportunities arise.
Watkin Jones has made a strong start to life as a public company and has demonstrated its ability to grow with good visibility of earnings and significant cash generation. Our prospects are encouraging and our aspiration is to continue to expand in both student accommodation and PRS, while adding to earnings by managing the completed developments. We look forward to the next year with confidence.”