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Watkin Jones Plc

Watkin Jones plc Cardiff and Belfast developments forward sold – Zeus Capital Comment

Watkin Jones plc (LON:WJG), a leading UK developer and constructor of multi occupancy property assets, with a focus on the student accommodation sector, announces today that it has forward sold another two of its developments to two institutional investors, both for undisclosed fees. The first development is situated on Bridge Street in Cardiff and the other is situated on Queen Street in Belfast.

The Cardiff development occupies a prominent position in Cardiff City Centre, and is located close to Cardiff Queen Street station. The 472 bed scheme is due for delivery in August 2018, ahead of the 2018-19 academic year. The Belfast development also occupies a prominent position in Belfast City Centre directly opposite John Bell House that was completed by Watkin Jones in August this year. This 340 bed scheme is also due for delivery in August 2018, ahead of the 2018-19 academic year.

Mark W Jones, Chief Executive Officer of Watkin Jones plc, said: “We are delighted to announce today that we have forward sold our developments in Cardiff and Belfast to two institutional investors in purpose built student accommodation, which further underpins the visibility of our earnings and cashflow. The interest in the sector remains strong.”

Zeus Capital said:

We note Watkin Jones’ announcement today confirming that the company has forward sold another two developments, in Cardiff and Belfast, to institutional investors. We leave forecasts unchanged but acknowledge that these further sales increase the visibility on earnings. We now assume c.65% of FY17 gross profit is derived from projects that have been forward sold. 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 and the structural growth in both Purpose Built Student Accommodation (PBSA) and the Private Rented Sector (PRS). On FY16 earnings, which the company confirmed are in line in its recent trading update (17th November), the shares trade on 9.6x. This falls to just 8.7x in FY17 with c.65% visibility after just two months of the financial year. We would hope that almost all of FY17 earnings will have been forward sold by the half year end mirroring the experience in FY16. The prospective yield of 5.3%, twice covered by earnings and underpinned by a strong balance sheet, remains attractive.

Successful forward sale of two developments: The two forward sold developments announced this morning in Cardiff and Belfast total a combined 812 beds. Both are due for completion in FY18 ahead of the 2018/19 academic year. The Cardiff development is a 472 bed scheme located in a prominent location in Cardiff City Centre, close to Cardiff Queen Street Station. The Belfast development is located in Belfast City Centre directly opposite John Bell House that was completed by Watkin Jones this year. The development is for 340 beds.

* Continued execution of the strategy underpins forecast certainty: At the time of the IPO (March 23rd), forecasts assumed c.55% of gross profit in FY17 was derived from forward sold projects. The successful forward sale of the Cardiff and Belfast developments announced today combined with the announcement (4th October) of the forward sale of the St. Mungo development in Glasgow increases the percentage of forecast FY17 gross profit from forward sold projects to c.65% after just two months of the new financial year. We expect further announcements over the coming weeks and hope that by the half year end in March a high proportion (+90%) of FY17 gross profit will be derived from forward sold projects. This will have the benefit of materially increasing forecast visibility into FY18 and beyond.

* Valuation not reflective of forecast certainty: The shares trade on an attractive PER of just 9.6x falling to 8.7x in FY17 and offering a prospective 5.3% yield on a balance sheet with estimated net cash of over £30m. We expect the shares to re-rate as the company creates a track record of delivering on forecasts. A 12x PER multiple on FY17 earnings would equate to c. 160p, offering c.34% upside.