watkin jones plc/media/files/w/watkin-jones/documents/watkin-jones-plc-28...mar 28, 2017 · watkin...

Watkin Jones plc

Please refer to the important disclosures shown on the back page and note that this information is Non-independent and categorised as Marketing Material

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]

90

100

110

120

130

140

150

160

170

Mar/16 Jun/16 Sep/16 Dec/16 Mar/17

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

www.equitydevelopment.co.uk 3

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:



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.



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.



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.



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.



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.



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.



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.



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.



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.



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.



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.



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.



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



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




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




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

[email protected]

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]

Equity Development is regulated by the Financial Conduct Authority

Equity Development Limited ('ED') is retained to act as financial adviser for various clients, some or all of whom may now or in

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,

or immediately after the note’s release. Publication is achieved by a new note being freely available from the ED website. ED's engagement with corporate clients is governed by the laws of England & Wales. In the UK, companies quoted on AIM are subject to lighter due diligence than shares quoted on the main market and are therefore more likely to carry a higher degree of risk than main market companies. This report is being provided to relevant persons by ED to provide background information about Watkin Jones. This document does not constitute, nor form part of, and should not be construed as, any offer for sale or purchase of (or solicitation of, or invitation to make any offer to buy or sell) any Securities (which may rise and fall in value). Nor shall it, or any part of it, form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Self-certification by investors can be completed free of charge at www.fisma.org

More information is available on our website

www.equitydevelopment.co.uk

Equity Development, 15 Eldon Street, London, EC2M 7LD. Contact: [email protected] 0207 065 2690

http://www.fisma.org/

mailto:[email protected]

watkin jones plc/media/files/w/watkin-jones/documents/watkin-jones-plc-28...mar 28, 2017 · watkin...

Documents