Watkin Jones plc. The Mozart of the property world. Humming along despite Brexit cacophony. PBSA and BTR generating positive real-returns

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1 Watkin Jones plc The Mozart of the property world 15th January 2019 Buying the best rarely comes cheap - albeit occasionally, the market offers up quality stocks at compelling prices. Enter Watkin Jones, a UK developer & manager of large, multi-occupancy accommodation - mostly student bedrooms (PBSA) and/or apartments for young professionals (BTR) trading on a modest 13.2x FY19 PER and paying an inflation busting 3.8% yield. This morning the company uncorked another virtuoso set of results, with FY18 turnover ( 363.1m up +20.3% vs LY), PBT ( 50.1m, +15.7%), EPS (16.0p, +13.8%), dividends (7.6p +15.2%, 6.6p) and net cash ( 80.2m +95.5%, worth 31p/share) all coming in ahead of our forecasts. Primarily thanks to a standout performance from PBSA m gross profit (equivalent to 84% group) on sales of 321.7m (margin 20.0% vs 21.0% LY), where 10 developments were completed covering 3,415 beds (3,314 LY) - ably supported by composed displays from the other 3 smaller divisions. Humming along despite Brexit cacophony YTD 19 trading is shaping up to be another record too, on the back of healthy growth/returns from PBSA & BTR vs most other fixed income assets (see below). Sweet music indeed, especially for liability orientated investors (eg pension funds). PBSA and BTR generating positive real-returns Company Data EPIC AIM:WJG Price (last close) 213p 52 week Hi/Lo 249p/178p Market cap 544m ED valuation/share 240p Daily volume 300k Share Price (p) 250p 230p 210p 190p 170p 150p 130p 110p 90p 70p 03/16 06/16 09/16 12/16 03/17 06/17 09/17 12/17 03/18 06/18 09/18 12/18 Source: Web Financial Company Description 5.0% 5.0% Watkin Jones is a tier 1 developer & manager of large scale, multi occupancy accommodation, focusing on purpose built 4.0% 4.0% 3.6% student accommodation (PBSA) and residential build to rent (BTR). 3.0% 2.9% 2.7% Both areas are expanding, supported by strong fundamentals enabling the firm to 2.3% leverage its reputation & industry 2.0% 1.9% expertise, along with operating a forward 1.0% 1.3% 1.3% sale, low risk, cashflow positive and capital light model. Residential property & agency lettings 0.0% businesses are also set to become growth engines. Next news: Trading update April 2019 Source: Source: Bank of England, ED estimates and various websites. NIY - Net Initial Yields Paul Hill (Analyst) paul.hill@equitydevelopment.co.uk Please refer to the important disclosures shown on the back page and note that this information is Non-independent and categorised as Marketing Material

2 Watkin Jones plc 15th January 2019 Top Pick operating in real estate sweet-spots In fact only last week bell-weather student property landlord Unite, said that the Dec 18 values of its UK and London portfolios had jumped 5.0% and 8.4% respectively YoY, augmented by estimated 2019 rental yields of 3.0%-3.5%. Not bad, considering overall UK property returns are predicted to be 1.9% in 2019 and c.2.9% pa over the next 5 years (source: CBRE). Merelina Sykes of Knight Frank, explaining that student housing is perceived to be a safe and resilient asset class in spite of the uncertainty surrounding Brexit. Here North American and Asian buyers are the most active, with the strongest appetite derived from the US, Singapore and Hong Kong. Demand greatest at Russell Group Universities So what s driving this swell of interest? Well according to UCAS - irrespective of a minor dip in the number of British 18 year olds over the next 2 years (re demographics) - PBSA should remain very strong, reflecting a lack of quality living space (see below). Similarly International students continue to be drawn by the UK s world class universities, language and culture (+6% 2017/18), on top of steady enrolment levels from the EU (+2% 2017/18). Forecast of University acceptances Source: ONS, gov.uk, CBRE In terms of PBSA, there are presently 627k beds - split 53:47 university vs corporately owned - with another 20k-30k being slated for this year, compared to 750k 1st year and international students. This modest expansion should be readily absorbed by increasing numbers opting for post-graduate courses (up >1/3rd in 10 years), alongside many 2nd & 3rd year undergrads choosing PBSA in preference to traditional digs. Metronomic growth in turnover and profits Meaning that, irrespective of any temporary disruption caused by Brexit, WJG should (at least) maintain its EPS growth for the foreseeable future. Hence we make no change to our FY19 projections, underpinned by excellent visibility over the next 4 years, including a secured PBSA pipeline 7,534 beds across 17 sites, representing an appraisal value of 650m (see below). 2

3 15th January 2019 Watkin Jones plc PBSA delivery pipeline (beds) 4,000 3,500 Delivered Beds forward sold Beds with planning permission Other beds (eg in legals) 3,000 2,500 2,000 1,500 1, FY17 FY18 FY19 FY20 FY21 Source: Company. NB: sales/profits track cost to complete contract accounting not just deliveries Mushrooming BTR market has just got going Likewise, WJG s BTR aspirations are progressing to plan bolstered by 7 schemes covering 1,500 apartments, all scheduled for delivery between FY20-22 and with planning permission. In May the firm was selected by M&G Real Estate and Lochailort, to develop a new 68.5m project in Reading, entailing 315 units (studio, 1, 2 or 3 bed). While in August, a 300-apartment project at Wembley was signed with Lum Chang Holdings Limited and Sin Heng Chang Private Ltd. BTR delivery pipeline (apartments) 1,200 Apartments forward sold Appts with planning permission Under offer / in legals 1, FY19 FY20 FY21 FY22/3 Source: ED estimates. NB: sales/profits track cost to complete contract accounting not just deliveries Elsewhere, there are several other opportunities either in legal negotiation or under offer. Not that there is any shortage of 3 rd party capital. Here institutional money (eg pension funds) is pouring into the sector, with 25,665 homes completed as at Sept 18, 41,870 under construction and a further 64,320 with building consent (see below : British Property Federation, BPF). 3

4 Watkin Jones plc 15th January 2019 Expanding UK Build to Rent market Source: Savills, BPF & Molior Strategically too, the Board continues to assess various options for creating a new BTR investment vehicle. We suspect that WJG would retain a minority stake, and could further realise robust returns, acting as either the fund manager and/or lettings agent. The Newco would provide a logical final destination and forward funding source for WJG s BTR sites, to be agreed on an arms length basis. More broadly, the UK housing market is being assisted by solid employment levels, low interest rates and competitive mortgages. The private rented sector (PRS) should also remain supply constrained with modestly improving rental growth and house prices pencilled in for the next 5 years (see below). Together providing a decent backdrop for WJG s fledgling house-building division focused in the North West, which completed 175 sales in FY18 vs 94 LY. Stable residential property market 4.0% House prices Rent 3.7% 3.5% 3.4% 3.0% 2.5% 2.7% 2.7% 2.3% 2.5% 2.7% 2.6% 2.0% 1.9% 1.9% 1.5% 1.3% 1.3% 1.0% 0.5% 0.0% Source: ONS, CBRE 4

5 15th January 2019 Watkin Jones plc Fresh delivers high margin recurring revenues Last but not least, WJG s Fresh lettings business goes from strength to strength - closing the year with 15,421 student beds (16,617 LY) and BTR apartments under management across 56 schemes (57 LY), of which 52% were constructed by 3 rd parties. The decline in units was simply a function of the loss of 4,597 beds following the sale of the Enigma property portfolio by the Curlew Student Trust (CST). Albeit partly offset by being appointed on 14 new sites for the 2018/19 academic year, resulting in a net drop of only 1,196. Compensation for early termination of the CST contract, resulted in a 4.3m exceptional gain split 3m cash and 1.3m carried interest. Further out Fresh already has a contracted orderbook of 18,258 student beds across 65 schemes by FY21, underpinning its recurring revenues. Capital-lite model offers further upside at lower risk Shareholders should not forget too that WJG s generates best-in-class asset turns (2.4x vs sector 1.4x) and RoE (23.8% vs 17.3%), mirroring its successful forward funded model. Current year asset turns vs sector peers Sector average Berkeley Inland Homes Bellway McCarthy & Stone Telford Homes Watkin Jones Taylor Wimpey Crest Nicholson Redrow Bovis Barratt Devs Persimmon Springfield Props Henry Boot Gleeson Countryside Source: Equity Development 5

6 Watkin Jones plc 15th January 2019 CY Return on Equity (RoE) vs peers Sector average Berkeley Inland Homes Bellway McCarthy & Stone Telford Homes Watkin Jones Taylor Wimpey Crest Nicholson Redrow Bovis Barratt Devs Persimmon Springfield Props Henry Boot Gleeson Countryside 7.7% 17.3% 18.0% 11.2% 18.5% 15.1% 23.8% 20.8% 16.3% 19.1% 14.3% 14.1% 15.1% 13.1% 17.5% 23.1% 28.4% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Source: Equity Development, company sites Valuation nudged up to 240p/share At 213p, the stock trades on FY19 PE & EV/EBIT multiples of 13.2x and 9.0x, along with offering a 3.8% dividend yield (see below). In our view, a deserved premium to peers in light of its superior cash generation, asset efficiency, sales visibility and risk profile. CY PER vs peers Sector average 8.4 Berkeley 10.4 Inland Homes 6.8 Bellway 6.3 McCarthy & Stone 12.9 Telford Homes 6.7 Watkin Jones 13.2 Taylor Wimpey 7.4 Crest Nicholson Redrow Bovis 8.2 Barratt Devs Persimmon Springfield Props Henry Boot Gleeson 10.8 Countryside Source: Equity Development 6

7 15th January 2019 Watkin Jones plc CY EV/EBIT vs peers Sector average Berkeley Inland Homes Bellway McCarthy & Stone Telford Homes Watkin Jones Taylor Wimpey Crest Nicholson Redrow Bovis Barratt Devs Persimmon Springfield Props Henry Boot Gleeson Countryside Source: Equity Development CY Dividend yield Sector average Berkeley Inland Homes Bellway McCarthy & Stone Telford Homes Watkin Jones Taylor Wimpey Crest Nicholson Redrow Bovis Barratt Devs Persimmon Springfield Props Henry Boot Gleeson Countryside 6.5% 5.7% 5.0% 5.4% 3.9% 5.5% 3.8% 5.6% 3.8% 3.6% 5.0% 4.1% 8.8% 9.3% 10.8% 11.6% 11.6% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% Source: Equity Development Likewise on a sum-of-the-parts basis (see below), we value the shares at a comfortable 240p: 7

8 Watkin Jones plc 15th January 2019 Sum of the parts valuation (pence/share) 250p 31p 200p 15p 16p 150p 240p 100p 178p 50p 0p PBSA/BTR Fresh Property House building Net cash Total Source: Equity Development Confident outlook New CEO Richard Simpson commenting Today Watkin Jones has reported a record set of full year results which show that the Group has performed strongly across all key financial metrics of the business. We continue to have excellent visibility of our future revenues and earnings, supported by the pipeline of forward sold and secured sites for student accommodation. The locations and forward sale values we have achieved for these schemes underpin our earnings expectations from this division over the next 12 months and beyond. Our success in securing the significant build to rent development agreements in Reading and Wembley, together with our secured pipeline of sites, is highly encouraging. In addition, our residential and accommodation management divisions are well positioned to contribute to progressive earnings growth. As a result, we remain confident in the outlook for the Group. 8

9 15th January 2019 Watkin Jones plc Summary financial projections Watkin Jones (continuing) 2015 Act 2016 Act 2017 Act 2018 Act 2019 Est 2020 Est 2021 Est 2022 Est 2023 Est 2024 Est (Sept yearend) 'ms 'ms 'ms 'ms 'ms 'ms 'ms 'ms 'ms 'ms Turnover Student (PBSA) accommodation Build to Rent (BTR) Residential development Fresh property management Other / construction Total Group revenue growth % YoY 73.5% 9.3% 13.1% 20.3% 7.4% 11.0% 10.6% 10.6% 8.7% 8.0% Student (PBSA) accommodation 3.9% 8.0% 22.1% -8.9% 3.5% 1.7% 0.0% 0.0% 0.0% Build to Rent (BTR) 209.5% % 50.0% 38.9% 36.0% 23.5% 19.0% Residential development -12.6% 65.3% -31.3% 65.8% 26.8% 5.3% 12.5% 11.1% 10.0% 9.1% Fresh property management 116.6% 19.2% -4.1% 15.0% 10.0% 10.0% 10.0% 10.0% Student (PBSA) accommodation Build to Rent (BTR) Residential development Fresh property management Other Group gross profit Group % margin 18.0% 20.2% 21.0% 20.0% 19.3% 18.4% 17.7% 17.4% 17.1% 17.0% Student (PBSA) accommodation 18.2% 20.5% 22.1% 19.4% 19.5% 18.7% 18.0% 18.0% 18.0% 18.0% Build to Rent (BTR) 56.3% 27.1% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% Residential development 16.6% 11.5% 3.8% 14.6% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% Fresh property management 58.9% 49.4% 61.8% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% Admin Distribution / other Adjusted EBIT % margin 13.3% 14.2% 14.1% 13.7% 13.3% 12.6% 12.2% 12.2% 12.2% 12.2% EBITDA (incl JV profits) % margin 13.8% 15.6% 15.0% 14.3% 13.6% 13.0% 12.5% 12.5% 12.5% 12.5% Profit from JVs Net interest Adj profit before Tax Effective tax rate -19.1% -20.5% -17.3% -18.6% -19.0% -18.0% -17.0% -17.0% -17.0% -17.0% Adjusted EPS (pence) EPS growth rate 138.5% 19.2% 13.1% 13.8% 1.3% 7.1% 8.2% 10.6% 8.9% 8.3% Net assets per share (p) Net tangible assets per share (p) Dividend (p) Valuation benchmarks P/E ratio Price/Tangible book P/NTAV (adjusted for sector average NTA turns) EV/EBIT Return on Equity (EPS/NA) 23.5% 30.8% 28.4% 26.6% 23.8% 22.6% 21.8% 21.5% 21.0% 20.4% Dividend yield 1.9% 3.1% 3.6% 3.8% 4.1% 4.4% 4.9% 5.3% 5.7% Net cash/(debt) Sharecount (Ks) 255, , , , , , , , , ,869 Shareprice 213 Source: Company historic data, Equity Development estimates. 9

10 Watkin Jones plc 15th January 2019 Key risks Impact of a substantial jump in UK interest rates and/or a recession. This seems unlikely though, given that even the most pessimistic economic forecasts are for >1.5% GDP growth through to Protracted delays in obtaining planning consent, which traditionally has plagued the whole sector. Availability of skilled labour and associated resources at desired cost levels. Foreign exchange fluctuations could impact demand from international investors, from say Singapore, Hong Kong and China. Being relatively small in BTR, Watkin Jones could get squeezed by larger rivals, partners and customers. Future access to funding at commercial rates, perhaps in the unlikely event of another banking crisis. Generic risks of retention/recruitment of key staff, etc. Acquiring land at affordable rates. Withdrawal of government support for house-building (eg H2B, FTBs, stamp duty, etc). Brexit, and other possible legislative changes, say concerning building regulations, affordable housing, ground rents, etc Less demand from institutional money, if for example bond/gilt yields were to rise materially. 10

11 Investor Access Hannah Crowe Felix Grant-Rennick Direct: Direct: Tel: Tel: Equity Development Limited 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. This document has not been approved for the purposes of Section 21(2) of the Financial Services & Markets Act 2000 of the United Kingdom ( FSMA ). Any person who is not a relevant person under this section should not act or rely on this document or any of its contents. 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 not deemed to be independent, as defined by the FCA, but is objective in that the authors are stating their own opinions. This document is prepared for clients under UK law. 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 plc. 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 ED may in the future provide, or may have in the past provided, investment banking services to the Company. ED, its Directors or persons connected may have in the future, or have had in the past, a material investment in the Company. More information is available on our website Equity Development, 15 Eldon Street, London, EC2M 7LD. Contact: info@equitydevelopment.co.uk