Watkin Jones plc
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Building Value
Established for over 200 years, Watkin Jones is one of the UK’s leading property
development companies involved in two of the hottest areas of residential real
estate, namely the purpose-built student accommodation (PBSA) and private
rented sector (PRS) segments.
The fundamentals for both markets are positive and Watkin Jones is very well
positioned to grow market share and profits despite operating a very low risk
and working capital light business model.
PBSA development - the long term fundamentals for the purpose built student
accommodation sector are very positive with growing student numbers, strong
demand for quality accommodation and institutional investors hungry for
exposure. In PBSA, Watkin Jones enjoys excellent visibility of revenues, profits
and cashflow through a combination of a strong development pipeline and a
forward sales model. It also has an exceptionally good delivery track record and
of gaining planning consents.
PBSA management - the company's Fresh Student Living business offers
vertical integration for the company within the student accommodation market
and offers an end-to-end solution for institutional investors. The revenue growth
opportunity, long-term nature of contracts and high margins within this
business are very attractive.
PRS development - the business is very well positioned to take advantage of
continued rising demand for developments within the private rented sector. The
company aims to operate along the same lines as its PBSA business, by
developing a strong pipeline and forward selling to institutions. The growth
opportunity could be significant in the medium term.
PRS management - the recently established PRS asset management business,
Five Nine Living aims to manage both Watkin Jones developed schemes and
external portfolios. Again, the medium term growth opportunity in this space is
significant.
Valuation
Watkin Jones trades on 11x PER for September 2017 with a 4.3% dividend yield. For the
following year Watkin Jones’ PER falls to 10x and a yield of 4.5%. This appears very
undemanding given the group’s consistent long term record of growth, its strong cash
generation, and its excellent medium term prospects as a leading developer within the
growing UK student accommodation market.
Watkin Jones currently trades at a 14% premium to the Housebuilding sector on PER but
we would argue that this is too small a premium at this stage of the cycle. We conclude
that Watkin Jones offers considerably better medium term visibility and growth than the
average Housebuilder and should therefore trade at a 30-50% PER premium to the
sector.
28 March, 2017
Company Data
EPIC AIM:WJG
Price 146p
52 week Hi/Lo 160p/100p
Market cap £372m
Share Price, p
Source: ADVFN
Description
Watkin Jones provides an end-to-end
solution in developing large scale, multi
occupancy accommodation projects,
with a primary focus on the student
accommodation market.
Mark Hughes (Analyst)
0207 065 2690 [email protected]
Hannah Crowe 0207 065 2692 [email protected]
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Watkin Jones plc 28 March, 2017
2 www.equitydevelopment.co.uk
About Watkin Jones
Watkin Jones is a leading UK developer, constructor and manager of multi-occupational
residential properties, with particular emphasis on student accommodation.
The company operates in two key areas, namely the development and management of
purpose-built student accommodation (PBSA), and development and management in the
private rented sector (PRS).
The following charts demonstrate the revenue and profit split of Watkin Jones' divisions for
the year ended 30 September 2016. The PBSA Mgt number reflects the 7 months results
following the acquisition of French Student Living into the Group on 25 February 2016.
Revenue by division £m
Source: Company
Gross profit by division £m
Source: Company
237.2
26.3
2.8 0.7
PBSA Dev
Residential
PBSA Mgt
Other
48.6
3
1.7 0.5
PBSA Dev
Residential
PBSA Mgt
Other
28 March, 2017 Watkin Jones plc
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The company successfully IPO'd at 100p with Zeus Capital and Peel Hunt in March 2016 and
went on to reach all of its strategic targets, achieving record operating profits in its first full
year results post flotation.
Geographically the company operates throughout the UK. The following chart demonstrates
the company’s current development locations:
Watkin Jones plc 28 March, 2017
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Student accommodation development
Since 1999, Watkin Jones has delivered more than 31,800 beds across 98 sites in this space,
making it the leading provider of purpose-built student accommodation. It has a reputation
for high quality and on-time delivery.
The company aims to achieve strong visibility of revenues, profits, EPS and cashflow through
the combination of a strong development pipeline and forward sales model, and offers an
end-to-end solution for investors in this segment.
The company has very strong institutional relationships. Its clients are leading institutions
such as CBRE Global, AIG, M&G, UBS, UPP, Brookfield, Arlington, GSA and L&G' amongst
others.
Watkin Jones is one of the few companies in the market that offers an end-to-end solution to
investors in PBSA. It identifies the site, achieves planning consents, develops and constructs
the property and manages the finished building.
As developers, constructors and asset managers, Watkin Jones captures margin throughout
the life of the asset from the development margin to the construction margin and eventually
the property management margin.
The company's development sites are spread across the UK and it organises its operating
divisions on the same basis. It negotiates national procurement terms with key subcontractors
and standardises development layouts in order to help control build cost.
Forward sales model
There are numerous benefits from forward selling developments. Primarily, it offers excellent
visibility of revenues, profits and cash flow. It also significantly reduces development risk,
and provides a working capital light development solution as the company sells the land and
then invoices the institutional buyer on a monthly basis throughout the construction phase
rather than at the end of the project. By forward selling developments to institutions Watkin
Jones does not compete with its institutional investors.
In-house expertise
The company has in-house expertise and resource that most of its competitors don't have.
Its planning team are experts in gaining approvals in student accommodation. Having the
expertise in-house offers cost benefits compared to using external consultants. Importantly,
it also allows works to start on time, and this is critical when delivering large developments
prior to the start of an academic year.
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Reputation
Reputation is important when dealing with large institutions. Quality of build aside, in a market
such as the student accommodation market with specific term times, the importance of timely
delivery cannot be over stressed. It is also important that the company keeps on top of market
trends so that its developments meet student and owner expectations.
PBSA margin improvement
The company used to undertake contract work in the space. However, in recent years, it has
been shifting away from lower margin contract work for third parties towards its own
development business. This coupled with more profitable development coming through the
system has led to a healthy increase in the gross profit margin. For example, in FY 2016 the
gross margin increased by 230 bps to 20.5% within the PBSA development business.
Strategy in PBSA development
The company’s strategic objective in PBSA development is to leverage its position as one of
the UK's leading developers in this market and take advantage of attractive trends within this
marketplace to sustain and increase earnings. It aims to develop between 3,000 and 4,000
beds per annum focusing on quality of earnings, and utilise its forward sales model to
minimise development risk. It also aims to continue to build strategic partnerships with
institutional investors.
Last financial year
In the last financial year the company completed 10 schemes or 3,819 beds and maintained
its 100% record of finishing ahead of the start of the academic year.
PBSA development pipeline
The student accommodation development pipeline equates to 27 sites or 9,469 beds with
GDV of c£800m. These developments will be delivered over three years and over 85% have
planning consent. Of these 3,314 are for delivery in 2017, 3,485 for delivery in 2018 and at
present 2,670 are for delivery in 2019 and beyond. The company will clearly add to this
pipeline. Of the 27 sites, 16 are currently forward sold and a further 6 are in legal negotiations.
A look at the 2017-2019 development programme
All 10 developments for completion in 2017 have planning consent and are forward sold, and
therefore 2017 offers very high visibility.
The company has also secured all development sites for 2018. It is looking to complete 11
schemes in that financial year and 10 sites already have planning consent. The remaining one
is progressing satisfactorily through planning. 53% are pre-sold and an additional 45% are in
legal negotiation for sale.
It has also secured six developments for 2019, two of these have planning consent and the
remainder are progressing satisfactorily. Therefore 2,670 beds are secured for delivery in
2019. A number of other sites are under offer with a view to further securing pipeline for 2019
and beyond.
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Some of the company's larger 2019 schemes will also contribute to FY 2017 and 2018
performance, in particular the 511 bed scheme in Stratford for the University of London, which
in terms of development value is Watkin Jones' largest ever project by development value.
Therefore, at present the company has a total of 21 developments due for completion by
FY2018, of which 15 are already forward sold and 5 are in legal negotiation for sale. Current
demand remains strong with eight of these developments being sold in the last financial year
and a further six so far in the current financial year.
As we see it, the biggest ongoing challenge for Watkin Jones is maintaining the development
pipeline. The business looks three years out and is typically working on 20-30 developments
- all at different stages. It aims to complete around ten large developments a year. With the
forward sales strategy offering visibility over a 2-3 year period it is therefore important that
the company continues to find sites to bring into the pipeline.
As we see it, by working on 20-30 projects at different stages of development the company
is in a position whereby if one site was to become delayed it could bring another site through
and meet expectations.
The development pipeline and forward sales strategy offers visibility 24 to 36 months out and
therefore Watkin Jones has time to move with market trends and is insulated from any sudden
domestic or global turmoil.
Strong track record in gaining planning consents
In the last financial year the company achieved planning consents on 10 developments (3,500
beds) and in the current financial year it has already secured four consents (1,579 beds), so
it has an excellent track record of developing a strong pipeline and achieving consents.
Competition
Watkin Jones is the only operator in the UK that provides the full end to end solution for third
party clients. Whilst there are other specialist PBSA developers in the UK market, most are
not involved in the construction of their own developments and do not provide ongoing asset
management services. The scale and geographical reach of many of Watkin Jones'
competitors varies considerably.
28 March, 2017 Watkin Jones plc
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Some are owner operators who invest in assets and manage developments themselves,
whereas some developers who operate in other areas outside of PBSA offer procurement,
planning and construction services within the sector. These are often housebuilding or
commercial property development businesses which have student accommodation divisions.
In our opinion, Watkin Jones' geographic coverage, market knowledge and their end to end
solution gives the company a significant competitive advantage. It must be again noted that
the forward sales strategy makes Watkin Jones very attractive to institutional investors who
are looking to increase exposure to the PBSA market. In our opinion Watkin Jones has a very
strong competitive position in the market.
The PBSA market
Institutional demand for this asset class remains high. During 2016 around £3.5bn of purpose-
built student accommodation assets were traded. Indeed this was the second highest year for
activity within this segment of the real estate market. And post Brexit the change in the value
of sterling against other currencies has seen new international buyers emerge as well as new
institutional buyers generally.
The institutional investment markets increasingly see UK PBSA as an important and core real
state holding. In 2016 JLL research demonstrated that 79% of institutional investors wanted
to increase their allocation to alternative assets. PBSA received the second highest allocation
at 19% of investment capital. In 2015 there was record investment in the sector at £5bn.
This was up 67% from the 2012 figure. The fundamentals within the student accommodation
investment market remain robust with positive supply demand dynamics, growing student
numbers, domestically and internationally, and an institutional investor base demanding high
quality assets, scale etc. This is driving record levels of investment activity in the space.
Occupier demand is also strong. There is a rise in the number of university applications with
the number of UCAS applications at an all-time high in 2015-16, only 532,000 of the 718,000
UCAS applications were accepted. This shows significant demand for university places. The
overall number of full-time students in the UK has been steady but growing at between 1.6
and 1.7 million since 2009, and there are c1.7m full time students studying in the UK (2015
data) at present. Average growth in student numbers since 2004 has been 2% per annum.
This is despite higher tuition fees. The number of students using PBSA has risen from 4.5%
to 6.4% over the past five years.
International students are important as they are even more likely to choose PBSA than UK
students. At present, around 7% of university students come from the EU and whilst there
was some concern about EU student numbers post Brexit, and the company continues to
monitor this, there does not appear to have been any effect on application numbers as yet.
That said the fall in the value of sterling should make studying in the UK cheaper for
international students so it is likely that the overall impact will be negligible anyway in our
opinion.
The UK is a more attractive proposition for most international students wanting an English
language based education, as the US is significantly more expensive and the logistics of
Australia aren't suited to many. When we look at Europe as a whole the UK has the most
universities (out of European countries) in the QS Top 200 world rankings and an increasing
global market share in the order of 15% according to JLL research.
Watkin Jones plc 28 March, 2017
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Around 20% of students in the UK come from outside the EU. There were 284,000 students
in 2014 / 15 within this group, an increase of 73% since 2004/05.
In summary the international student market continues to grow and UK demographics also
suggest an upturn in the student population from 2021. This bodes well for the PBSA asset
class.
Approximately 7% of the 1.7 million full-time students in the UK live in privately owned PBSA,
and around 17% in total live in university-controlled PBSA. Therefore in our opinion there is
significant scope for increased penetration of private PBSA, particularly as approximately 75%
of university controlled PBSA was built pre 1999 and universities increasingly turn to the
private sector for the provision of student accommodation. Indeed over the past four years
most of the growth in PBSA has come from the private sector. It is striking when we look at
the 2016 data, where private sector numbers increased by 43% compared to just 5% for
university accommodation in the same period.
There are 568,000 purpose-built bed spaces across the UK at present including over 78,000
purpose-built bed spaces in London according to research by Cushman and Wakefield. In
2016/17, 29,000 new purpose-built came through, with 21,400 coming from the private
sector. According to Cushman and Wakefield, student rents grew by 2.7% in 2016. Over the
next five years the private PBSA market is expected to grow by £30bn.
Students are investing a lot in their education and are increasingly wanting better places to
live. A significant proportion (thought to be around three quarters) of the university-controlled
stock is outdated, and as this stock is taken out of the system it is not being replaced at the
same build rate and therefore there is a supply:demand imbalance. It is also worth reflecting
on the fact that legislation and higher stamp duty are limiting the supply of houses for multiple
occupation in general and this is also making the PBSA route more attractive.
Student accommodation management
The student accommodation management business is called Fresh Student Living. Fresh is
one of the leading independent PBSA managers in the UK. Having the Fresh business means
that Watkin Jones can offer institutional clients a complete end-to-end solution in PBSA, and
by dealing with institutions on an ongoing basis the company also has permanent ongoing
dialogue with its institutional clients.
Fresh was acquired in February 2016 immediately prior to flotation and offers a degree of
vertical integration for the company. The company employs 374 staff across 25 UK towns and
cities and offers lettings and management services for a range of clients on contracts that
range between 3-7 years. Consultation and mobilisation services are also available for
schemes in development.
At the start of the current financial year, Fresh was contracted to manage 44 schemes (12,337
beds). This equated to around 50% growth year-on-year between 2016 (8,310 beds) and
2017. For 2018 the company is contracted to manage 16,431 beds and it has been contracted
to manage 18,636 beds for FY2020. These figures exclude the beds from the company’s own
development pipeline where the asset has not yet been sold and the engagement of Fresh
has not yet been confirmed.
28 March, 2017 Watkin Jones plc
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Fresh's current annual contracted fee income is £4.6m and this should rise to £6.0m over the
next two years. The business achieves a very attractive gross margin of circa 60% and we
see this as sustainable. Fresh requires little working capital.
Strategy in PBSA asset management
Watkin Jones' strategy is to continue to grow the number of beds under management by
Fresh. It will focus on winning the management of existing developments from its competitors,
and develop new student accommodation assets for clients with the objective that Fresh is
appointed to provide the ongoing management. Operationally Fresh has the capacity to
expand to 30,000 beds under management without the need for any further significant
investment in its operating platform.
Private rented sector (PRS)
PRS is a key part of Watkin Jones' overall growth strategy. Having entered this market in
2015, drawing on its expertise in PBSA to deliver rental properties for institutional investors,
Watkin Jones is well positioned to take advantage of rising demand for developments within
the private rented sector.
Its first scheme is due for completion in the current financial year. This 322 apartment scheme
is in Leeds. This scheme has been sold to AIG and construction is proceeding to plan with
completion imminent.
In addition to the Leeds scheme, the company has submitted a planning application for a 300
unit scheme in Leicester. This sits on a site already owned by Watkin Jones.
The company is also in negotiations on a number of other development opportunities.
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A look at this segment of the market
We believe there is a significant growth opportunity within the private rented sector. The
strategy on PRS is to develop the model along the same lines as the student accommodation
model by forward selling developments to large institutional investors, to an extent leveraging
its current institutional relationships.
As with student accommodation, the forward funding of schemes by institutional investors is
significantly positive from a cash flow and working capital perspective. Therefore working
capital requirements are minimal, ROCE is excellent and visibility is ensured. It also makes
the division very scalable as again, cash can be rolled into other PRS development
opportunities.
Watkin Jones should have a competitive advantage as it can use its existing supply chain.
PRS developments do not have specific completion dates and therefore Watkin Jones should
be in a position to stagger PRS completions around its PBSA schedule. It is also worth pointing
out that at present the company only needs certain subcontractor trades for several months
of the year. If the subcontracting trades were to be utilised on PRS schemes too, the business
could be more efficient and in a position to drive out further cost, while giving its supply chain
more work, which would further improve the relationship with its supply chain.
PRS is an attractive market in our opinion. Interest in the sector is driven by a significant
supply demand imbalance in UK housing, a lack of affordability in some areas of the UK, and
institutional investor demand for residential exposure.
The structural supply and demand imbalance in UK residential property is well known. In the
UK we have built an average of 180,000 new homes per annum over the past few decades.
The 2004 report by Kate Barker into the state of UK housing demonstrated that we should be
building around 250,000 homes per year to match demand. Therefore there is structural
undersupply, particularly in some cities and affordability is an issue in those areas.
It is likely that a number of the young adults aged between 20 and 30 who have become
accustomed to the benefits of all-inclusive PBSA will make up a significant share of the PRS
market. Some of these consumers enjoy the flexibility of renting and many simply hold back
from owning property on grounds of affordability.
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As the supply demand imbalance has put housing affordability beyond the reach of many first-
time buyers the number of first-time buyers in the market has declined by half over the past
20 years. This forms the backdrop to the investment case for build to rent or PRS
development.
There has been significant growth in the number of private renters over this time. That said,
the market remains very fragmented and is still largely dominated by small buy-to-let
landlords. Indeed only 3% of private rented properties are owned and operated by
institutions. The UK residential market is seen as very attractive from an income perspective,
particularly as there is a strong correlation between UK residential rents and RPI. Residential
real estate's income is seen as one of the most sustainable.
Strategy in PRS
The company intends to progressively grow within the PRS market by leveraging its expertise
in PBSA in order to capitalise on the similarities between the two markets. It will use the
expertise of its residential development teams and engage with its existing institutional
investors with a view to forward funding and de-risking these PRS projects. We expect a
growing contribution from PRS in the coming years.
Five Nine Living - PRS management
The company recently established a PRS asset management business called Five Nine Living
which will manage and operate the Leeds PRS development. It is also seeing strong interest
from other PRS developers to manage assets. A lot of this potential business is being driven
by existing relationships at the Fresh Student Living asset management business.
Strategy in PRS management
Watkin Jones intends rolling out Five Nine Living to offer PRS management to new and existing
clients.
Private residential development
The company has a residential division Watkin Jones Homes which builds properties ranging
from executive and family homes to apartments. This business sold 127 units in the last
financial year (versus 69 in the prior year). The division has been achieving sub-optimal gross
margins in recent years due to sales coming through on two legacy sites at zero gross margin
where the focus for the management team was to release cash from inventory. Sales at the
two sites (Chester and Droylsden Manchester) totalled £11m in the last financial year, and
sales at the Droylsden site are ongoing. That said, the divisional margin improved significantly
in the last financial year (from 6.4% to 11.5%) and is expected to rise further over the next
few years as those legacy issues dissipate.
Our analysis suggests the gross margin for the residential business will continue to improve
as more profitable developments come on stream. The private residential business has a land
bank of 573 plots.
Strategy in private residential
The company’s strategic objectives within private residential are to continue to develop sites
from its current residential land bank and strategically acquire new site for residential
development if and when they become available.
Watkin Jones plc 28 March, 2017
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Business model in PBSA and PRS development
Watkin Jones' development projects have four principal phases. Since the company completed
its first PBSA scheme in 1999, it has developed substantial expertise and real competitive
advantages in each of these areas.
Phase 1 - Site procurement and planning
identify site
negotiation of option-acquisition
obtaining planning permission
discussions with Universities / key stakeholders
Watkin Jones uses its market knowledge and understanding of investor demand to target key
towns and cities with the potential for new developments. It then identifies sites through its
own staff, its network of agents and other consultants who are aware of its requirements.
This enables the company to buy most sites off-market. Its track record helps it buy at
attractive prices since it can offer vendors more certainty of completion.
It reduces risk by acquiring sites subject to planning. Its expert team then liaises with the
planning authority to obtain consent. This in-house resources is unusual in the sector and
gives the company a significant advantage in our opinion, allowing it to obtain planning
permission on a timely basis at a relatively low cost compared to other companies using
external consultants. This helps the company to start on site sooner and deliver projects on
time. This is critical in the PBSA market in particular.
Phase 2 - To transaction and funding
a forward sale to institutional investors
value-added opportunities
land sale and development agreement
Watkin Jones' reputation and track record of delivering quality developments on-time makes
it a partner of choice for many key investors in the PBSA market and the emerging PRS
market. Institutions desire to work with “Tier 1” developers such as Watkin Jones and this
acts as an important barrier to entry.
The company's forward sale model reduces its risk. It aims to sell each scheme to investors
before it starts construction. This provides excellent visibility on revenues, profits and
cashflow for the company. The model has attractive cash flow characteristics as the company
bills the purchaser for the land and then bills each month during the construction phase,
rather than simply receiving a lump sum on completion of the development. Selling all of its
developments means that the company does not compete with its institutional clients, and
therefore these clients are encouraged to share their strategic plans with Watkin Jones. The
company looks for ways to add value for its clients such as negotiating direct arrangements
with universities.
28 March, 2017 Watkin Jones plc
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Phase 3 - Construction and delivery
Unlike many developers, Watkin Jones is also an experienced construction company. It
employs expert construction directors and project managers to deliver its schemes. This
means that it does not rely on third-party contractors increasing its marginal ability to deliver
on-time.
The company has long-term relationships and agreed national rates with key suppliers. By
staggering its PBSA and PRS developments it can make use of the same supply chain for both
divisions. The supply chain regularly follows it from scheme for scheme and becomes part of
the expert development team. This helps Watkin Jones to deliver to a high standard and
reduces its costs. It monitors progress and costs against timeliness and budgets each month
to ensure successful delivery.
Phase 4 - Asset management
Fresh Student Living enables Watkin Jones to offer a complete solution to investors for the
entire life of an asset, giving it an income stream beyond development completion. The
company draws on Fresh's expertise in city selection, engagement with universities, scheme
design and marketing. This keeps management up-to-date with the latest trends so that it
can adapt its schemes accordingly. Having invested significantly in systems and processes, in
our opinion Fresh is a very scalable platform, and the required investment involved means
barriers to entry are high with a minimum of 5000 beds under management required to break
even. Five Nine Living, its new asset management business in PRS will allow it to replicate
Fresh's service in this market.
A look back at Watkin Jones’ maiden results
With the maiden results, Watkin Jones was able to report that revenues, margins and profits
were all well ahead of the prior year. Importantly, everything that investors had expected to
see at IPO was achieved.
Revenues increased by 9% to £267m with growth in PBSA development, residential and the
first contribution from the PBSA management business, Fresh. Gross profit was up 22% to
£53.8m, with the gross margin increasing 210 bps to 20.1% as the group continued its
planned shift towards higher margin own development business. The operating margin
increased by 90bps to 14.2%, and underlying operating profits rose by 17% to £37.9m.
Adjusted EBITDA was up 22% to £41.6m. Adjusted PBT was £39.8m, EPS was up 19% to
12.4p, in line with IPO guidance and the full year DPS was 4.0p. At the year end, net cash
was £32m.
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Summary
All of the fundamental drivers for Watkin Jones are positive in our opinion. From an asset
perspective institutional demand for both student accommodation and PRS is strong. From an
asset management perspective, Fresh and Five Nine offer the group the benefits of annuity
style management income. When we look at demand from a consumer perspective, demand
for quality accommodation from students and renters is also positive. Couple these drivers
with the fact that the company has an excellent management team and a strong balance
sheet, it could be argued that the stock looks inexpensive given the growth opportunity.
Directors
Granville Turner - Independent Non-Executive Chairman
Granville has almost 40 years’ experience in retail banking and the property sector. His past
Directorships include Rightmove, St James's Place, Sainsbury's Bank, Countrywide and
Realogy, the largest realtor in the US.
Granville was Chairman of ThreeSixty Developments (formally Knightsbridge Student
Housing), and as Chairman of Bellpenny Ltd and Titlestone Ltd. He is also a Non-Executive
Director of Zoopla Property Group, the Department for Communities and Local Government
and the English National Ballet. He is a qualified Chartered Banker and holds an MBA from
Cranfield School of Management.
Mark Watkin Jones - Chief Executive Officer
Mark has been involved in Watkin Jones full-time since 1990 when he graduated from
Portsmouth Polytechnic with a degree in Construction Management. He was appointed MD in
2003 and has been instrumental in the group’s growth introducing the structures and
procedures that allow the business to operate as it does today. He has been recognised for
strong leadership and people development skills by Construction Excellence. He has also
received Ernst & Young Real Estate Entrepreneur of the Year award and in 2016 won the
Wales Insider Property Personality of the Year.
Philip Byrom - CFO
Philip has been CFO since joining Watkin Jones in 2002. He has led a number of complex
financial arrangements and material property and corporate transactions. Philip qualified as
a chartered accountant with Price Waterhouse in 1990 and progressed rapidly to senior
manager giving him responsibility for several public company clients. He moved into industry
in 1995 and gained a broad experience through group and divisional financial roles, including
as divisional FD for pharmaceutical technologies at BWI plc. Philip has a degree in civil
engineering from Manchester University.
Simon Laffin - Independent NED
Simon is Chairman of Flybe Group and Assura. Previously Simon was non-executive director
of Quintain Estates, Aegis Group, Mitchells and Butlers, Northern Rock (as part of the rescue
team). He has also served as Chairman of Hoselock Group and an advisor to CVC Capital
Partners. Prior to this he was Group Finance and Property Director of Safeway plc.
28 March, 2017 Watkin Jones plc
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Valuation
The company's model is such that, in our opinion, a PE and Dividend Yield based valuation
technique is logical. This also helps us take account of the fact that it has a strong forward
sold position and asset management divisions.
The stock trades on a September 2017 PER of 11.0x falling to 10.0x with a 2017 dividend
yield of 4.3%. For investors who bought at the IPO price of 100p the current dividend yield
on acquisition is 6.3%.
How should we value this company?
Next we ask ourselves the questions 'is this cheap?' and 'how should we value Watkin Jones
anyway?' A good starting point would be to compare the earnings multiple of Watkin Jones to
a traditional housebuilder.
At present the housebuilding sector trades on an average PER for 2017 of 9.6x. The sector
enjoys reasonable visibility, but not the same degree of visibility that Watkin Jones enjoys,
and this company has the added growth opportunities within property management and the
private rented sector. Whilst some traditional Housebuilders also have PRS opportunities, it
represents a smaller opportunity relative to the overall size of the business.
Watkin Jones currently trades at a 14% premium to the sector on PER but we would argue
that this is too small a premium at this stage of the cycle. We conclude that Watkin Jones
offers better medium term visibility and growth than the average Housebuilder and should
therefore trade at a 30-50% PER premium to the Housebuilding sector.
Secondary placing of shares
Last week’s £70m secondary placing showed strong institutional demand for Watkin Jones’
shares at 140p. As a result of this placing the free float is now an attractive 65% of the
company.
Watkin Jones plc 28 March, 2017
16 www.equitydevelopment.co.uk
Income Statement
£m, Y/E 30 September 2015 2016 2017E 2018E 2019E
Revenues
Student Accommodation 228.2 237.2 243.4 260.8 276.1
% change 9% 3.9% 2.6% 7.2% 5.9%
Fresh (Student Living) 0 2.8 5.8 7.2 7.8
% change 0.0% 0.0% 107.0% 24.0% 8.0%
Residential & Other 16.1 27.0 23.0 25.8 28.8
% change -12% 67.7% -15.0% 12.5% 11.5%
Total Revenue 244.3 267.0 272.1 293.8 312.6
% change 5% 9.3% 1.9% 8.0% 6.4%
Gross profit 44 53.8 60.4 65.1 68.4
% margin 18.0% 20.1% 22.2% 22.2% 21.9%
Gross Profit
Student Accommodation 41.5 48.6 53.3 56.6 59.1
margin % 18% 21% 22% 22% 21%
Fresh (Student Living) 0 1.7 3.5 4.3 4.7
margin % 0.0% 59% 60.0% 60.0% 60.0%
Residential & Other 2.5 3.6 3.6 4.2 4.7
margin % 16% 13% 16% 16% 16%
Central Overheads -11.1 -15.3 -18.5 -19.7 -20.0
% sales
Depreciation & Amortisation -0.5 -0.6 -1.0 -1.0 -1.0
Operating Profit 32.5 37.9 40.9 44.4 47.4
% margin 13.3% 14.2% 15.0% 15.1% 15.2%
Interest -0.7 -1.0 -1.0 -0.7 -0.7
JV's 1.2 3.0 2.6 2.8 3.0
Exceptionals 0 -26.6 0.0 0.0 0.0
Reported PBT 32.9 13.2 42.5 46.5 49.7
PBT 32.9 39.8 42.5 46.5 49.7
Tax -6.3 -8.2 -8.5 -9.57 -10.0
Tax rate % 19.1% 20.6% 20.0% 20.0% 20.0%
Reported PAT 26.6 5.0 34.0 36.9 39.7
PAT 26.6 31.6 34.0 36.9 39.7
Number of shares (diluted) m 255 255.0 255.3 255.3 255.3
EPS, p 10.4 12.4 13.3 14.5 15.6
% change 141% 18.8% 7.5% 8.5% 7.6%
Share price p 146
Market cap £m 372.3
Source: Company historic data and ED forecasts
28 March, 2017 Watkin Jones plc
www.equitydevelopment.co.uk 17
Forecasts
We have a significant amount of visibility on our PBSA development forecasts given the
pipeline of development and very strong forward sales position that the company enjoys, and
this division makes up 89% of 2017E sales.
We have taken a conservative approach to forecasting the PRS development and asset
management businesses at this stage.
The group sees a through the cycle gross margin of 20% as sustainable.
CAGR EPS over the next three years is 9% despite the conservative nature of our forecasting,
particularly on the PRS side of the business.
Overheads
Overheads comprise admin expenses and distribution costs and include a number of key
functions such as in-house procurement quantity surveying and commercial teams.
Overheads increased by 37% in 2016 to £15.9m, reflecting the expansion of the group’s
operations (including overheads attributable to Fresh).
Joint ventures
The company has a number of project specific joint-ventures in Northern Ireland relating to
student accommodation schemes in Belfast. The company completed a scheme in 2016 and
forward sold a second scheme. In addition to this it had a joint-venture interest in a PBSA
scheme in Ipswich which it sold in the first quarter of FY 2017. In 2016 the company's share
of profit from joint-venture's totalled £3m, up from £1.2m in 2015.
We forecast PBT of £42.5m and £46.5m for 2017E and 2018E, EPS of 13.3p and 14.5p and a
DPS of 6.3p and 6.6p
Dividends
The company paid a total of 4.0p dividend in 2016, in line with IPO guidance. Our dividend
forecasts are set out in the following table:
Dividend Forecasts
Y/E 30 September 2015 2016 2017E 2018E 2019E
DPS p 0 4.0 6.3 6.6 7.1
DPS growth rate 58.7% 3.6% 7.6%
Dividend Yield 2.7% 4.3% 4.5% 4.8%
Dividend Cover x 3.1 2.1 2.2 2.2
Source: Company historic data and ED forecasts
Watkin Jones plc 28 March, 2017
18 www.equitydevelopment.co.uk
Cash Flow
£m, Y/E 30 September 2015 2016 2017E 2018E 2019E
Operating Profit 32.5 37.9 40.9 44.4 47.4
Depreciation & Amortisation 0.5 0.6 1 1 1
EBITDA 33.0 38.5 41.9 45.4 48.4
Working Capital -0.2 13.4 5.2 -6.5 -15.6
Other -2.1 -1 0 0 0
Operating Cash Flow 30.7 50.9 47.1 38.9 32.8
Net interest -0.8 -1.0 -1.0 -0.7 -0.6
JV Income 2.6 3 2.9 2.8 3
Tax -2.8 -8.5 -8 -8.7 -9.3
Net Operating Cash Flow 29.7 44.4 41.0 32.3 25.9
Investments -0.4 5.8 0 0 0
Capex 0 0 -0.4 -0.4 -0.5
Free Cash Flow 29.3 50.2 40.6 31.9 25.4
Acquisitions / Disposals 0 -14.5 0 0 0
Cash Flow before Financing 29.3 35.7 40.6 31.9 25.4
Equity 0 0 0 0 0
Borrowings 4.3 -4.8 0.6 0.3 0
Dividends 0 -3.4 -12.2 -16.3 -17.2
Pre-IPO Dividend 0 -39.3 0 0 0
Net Finance Lease -0.4 -0.3 0 0 0
Cash Flow 33.2 -12 29.0 15.9 8.2
Cash at start of year 25.9 59.2 47.2 76.2 92.1
Cash Flow 33.2 -12 29.0 15.9 8.2
Cash at end of year 59.2 47.2 76.2 92.1 100.3
Total Debt (Incl finance leases) -20.2 -15 -15.6 -15.9 -15.9
Net (Debt) / Cash 39.0 32.2 60.6 76.2 84.4
Source: Company historic data and ED forecasts
28 March, 2017 Watkin Jones plc
www.equitydevelopment.co.uk 19
Watkin Jones has a very strong balance sheet. At the year-end (30 Sept 2016) it had net cash
of £32.2m.
Our forecasts assume that the balance sheet strengthens further by the end of the current
financial year and that the company has net cash of £60.6m by the year end and peak year
end net cash in 2019 of £84.5m.
The company has a new £40m 5-year revolving credit facility and £10m working capital facility
with HSBC to provide flexible funding and working capital headroom, although these facilities
were unused in 2016.
Head of Corporate
Gilbert Ellacombe Direct: 0207 065 2698 Tel: 0207 065 2690
Investor Access
Hannah Crowe Ben Ferguson Direct: 0207 065 2692 Direct: 0207 065 2693 Tel: 0207 065 2690 Tel: 0207 065 2690
[email protected] [email protected]
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the future have an interest in the contents of this document and/or in the Company. In the preparation of this report ED has
taken professional efforts to ensure that the facts stated herein are clear, fair and not misleading, but make no guarantee as
to the accuracy or completeness of the information or opinions contained herein.
The research in this document has been produced in accordance with COBS 12.3 as Non-Independent Research and is a marketing communication. This document is not directed at, may not be suitable for and should not be relied on by anyone who is not an investment professional including retail clients. It does not constitute a personal investment recommendation and recipients must satisfy themselves that any dealing is appropriate in the light of their own understanding, appraisal of risk and reward, objectives, experience, and financial and operational resources. Research on its client companies produced and distributed by ED is normally commissioned and paid for by those companies themselves ('issuer financed research') and as such is deemed to be 'non-independent research' but is 'objective' in that the authors are stating their own opinions. This report has not been produced under legal requirements designed for independent research. ED may in the future provide, or may have in the past provided, investment banking services to its client companies. For ED's employees and consultants there are rules to prevent dealing in the shares of client companies whilst notes are being prepared,
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