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Read on to see an article posted on the OMG blog on 19 January 2021:

Developing prospects for Watkin Jones

Watkin Jones (LSE: WJG) is in the middle of changing its focus from developing student accommodation to build-to-rent and affordable residential housing. Comparing the company’s own description of its activities from the figures one year ago to the latest ones shows that build-to-rent is mentioned before student accommodation when it was the other way round previously.

Build-to-rent was around one-quarter of revenues last year and that should increase to more than two-fifths in two years’ time. Build-to-rent does not have the gross margin of student accommodation, but the contribution to gross profit should rise from one-fifth to more than one-third.

Institutions are returning to the student accommodation market so it will continue to be a significant contributor even if growth could be modest. Once they are able to most students will want to return to normal, rather than online, life and applications to universities and colleges remain at record levels.

Build-to-rent is set to be a growth area for many years as more people rent rather than buy. Uncertainties are likely to lead to the trend continuing.

There is an absence of good housing stock for this rental demand and that is why the outlook is positive for Watkin Jones – similar to Sigma Capital (LSE: SGM). Watkin Jones already has the connections with the potential investors.

Watkin Jones has been building up its build-to-rent pipeline in recent months. There are 4,466 apartments secured or subject to planning permission over the next five years. More will be added.

Assuming planning permission, there should be a significant build up of developments over the five-year period.

The build-to-rent and student properties continue to provide attractive yields for institutions, so demand should be maintained. There were delays in the second half of last year, but this is a short-term effect. Watkin Jones does not take on significant risk because developments are forward funded by the institutions. Three deals have been done since September for completion in 2021-22.

The newest part of the strategy is the trial of affordable housing developments. These could be sold as individual units or to a housing association, which would reduce the risk and working capital involved.

I have thought about recommending Watkin Jones previously, but I was not previously confident in what might happen in the short-term. That means that the share price has already recovered. Even so, the shares are attractive. They provide a combination of growth and income – the policy is to pay a dividend twice-covered by earnings.

The build-to-rent and residential operations will benefit from housing demand in the UK, while student accommodation will still be required and remain an important generator of revenues and profit. Forward funding by institutions helps to underpin the figures.

The change in focus had already begun before Covid-19 and the benefits from the investment in rental and residential will show though over the coming years. Long-term buy.

Buy Now - £72.60/year

Business

Watkin Jones has four main operations. The student accommodation development operations have dominated in the past and they will remain significant. On the back of this business there is accommodation management operation Fresh Property, which provides recurring income, although in the past it has been hit by the withdrawal of properties by their owners.

Build-to-rent is the newest part of the group, but it is fast-growing. The model of developing rental properties and selling them on to institutional investors is the same as for student accommodation. There is also potential for the management business.

Residential development in north west England has been a consistent part of the group, but it has been a small proportion of revenues in the time since flotation in March 2016. The change in strategy to affordable housing provides another market with significant demand.

 

Finance

In the year to September 2020, revenues dipped from £374.8m to £354.1m, while pre-tax profit fell from £50.4m to £45.8m. A final dividend of 7.35p a share is being paid (ex-dividend on 27 January), conforming to the two-times cover policy, down from a total dividend of 8.35p a share.

The profit excludes the £14.8m provision to replace cladding on previous developments. There were also additional costs due to Covid-19 and a property write-down.

Net cash was £94.8m at the end of September 2020, excluding lease liabilities. That was helped by the lack of interim dividend payment. The total dividend will be paid during the first half, so including the next interim, the dividend payout will be high this year. That is behind the expectation of a decline in net cash to £85.2m.

Pre-tax profit should recover to £50m this year, putting the shares on 13 times prospective earnings. There could be a dividend of 8p a share, providing a yield of nearly 4%. There is potential for a better outturn.

 

Trading strategy

Long-term buy for growth and income.

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Watkin Jones (LSE: WJG)

202p

Mkt Cap: £517m

Next results: Interims, June

Buy Now - £72.60/year

Read more sample articles:

7 July 2020 - A mine with an algorithm on the top

25 April 2021 – Party on

7 February 2021 – Can't get much worse

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