Watkin Jones plc. Excellent end of term report. Full year result statement. PBSA development. BTR development. Accommodation management.

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1 Watkin Jones plc Excellent end of term report 18 January 2018 Watkin Jones has reported a strong set of full year results with PBT, EPS and DPS in line with expectations. At this stage in the cycle the attractions of investing in a company that operates a lower risk model in two of the most attractive areas of residential real estate, namely purpose-built student accommodation (PBSA) and build to rent sector (BTR) are apparent, and we believe the stock justifies a significant premium to other housebuilders. Company Data EPIC AIM:WJG Price (last close) 206p 52 week Hi/Lo 249p / 128p Market cap 518m Full year result statement The company produced another strong set of results for the year driven by student accommodation developments. Revenues were up 13.1% to 301.9m, and when coupled with gross margin gains, this drove an 18% increase in gross profits. PBT rose to 43.3m; EPS +12.9% to 14.0p. The total DPS for the year was 6.6p, up 10.0% year on year. Net cash rose to 41.0m Share Price, p PBSA development Watkin Jones largest division reported strong profit growth for the year with a good increase in gross margins. Visibility of sales and earnings is very high in this division and therefore it is set to have another solid year in BTR development The company completed its first BTR development in Leeds in With five sites secured, and three further development opportunities progressing, we believe the medium term growth opportunity in this space is significant. Accommodation management Fresh Student Living continues to grow its number of beds under management. It currently has 16,082 beds under management and this is set to grow to around 20,000 by Five Nine currently has 535 BTR units under management and we expect this to grow in the coming years Jan/17 Apr/17 Jul/17 Oct/17 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. Valuation Watkin Jones shares trade on 13.7x PER (calendarised) for September 2018 with a 3.5% dividend yield. For the following year the PER falls to 12.9x and a yield of 3.8%. In our opinion this is undemanding given the group s consistent long term record of profit growth, its strong cash generation profile, its excellent medium term prospects as a leading developer within the growing UK student accommodation market and the growth opportunity within its BTR operation. 13.7x represents a 39% premium to the Housebuilding sector on PER. We continue to argue 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. Mark Hughes (Analyst) mark@equitydevelopment.co.uk Hannah Crowe hannah@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 18 January 2018 Watkin Jones is one of the UK s leading property development companies operating in two of the hottest areas of residential real estate, namely the purpose-built student accommodation (PBSA) and build to rent (BTR) 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. Full Year Results Revenues were 301.9m, which was ahead of our expectations and up 13.1% on The company enjoyed a significant 90bps increase in gross margins during This was due to the location and quality of many of its student accommodation schemes on the development side, as well as a full contribution from Fresh Student Living which was acquired part way through Gross profits increased by 18.0% to 63.5m (versus 53.8m in 2017). Operating profits rose 12.7% to 42.7m. Adjusted PBT came in at 43.3m. Adjusted basic EPS rose 12.9% to 14.0p (from 12.4p in 2016). Watkin Jones has a progressive dividend policy and therefore it has announced a 10% increase in the dividend to 6.6p per share compared to an annualised equivalent 6.0p per share in The final dividend of 4.4p goes XD on 25th January and will be paid on 28th February. From 2019, a policy of 2.0x cover will be implemented. The company had 41.0m of net cash at the year end. PBSA development The largest area of the business is purpose-built student accommodation. The long term fundamentals for PBSA 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 cash flow through a combination of a strong development pipeline and its forward sales model. The forward sales model also reduces development risk. It also has an exceptionally good delivery track record of gaining planning consents. Watkin Jones is the leading provider of purpose built student accommodation in the UK. Since 1999, Watkin Jones has delivered more than 34,500 beds across 107 sites in this space. It has a reputation for high quality and on-time delivery. The company has very strong institutional relationships. Its clients are leading institutions such as CBRE Global, AIG, M&G, UBS, UPP, Brookfield, Generation Estates, Arlington, GSA, L&G and La Salle amongst others. As we outlined above, all 10 ten planned developments completed in the year (3,314 beds) and delivered ahead of the 2017/18 academic year. Revenues from student accommodation developments were 256.1m, versus 237.2m in In total, 17 PBSA developments (6,578 beds) were sold during the year, including one operational unit (590 beds), for a total development value of 506.0m. Gross margins rose significantly in the PBSA development business with 2016's 20.5% margin rising to 22.1% during the year. The student accommodation development pipeline equates to 23 sites or 9,120 beds. 15 of these are already forward sold (6,090 beds). These developments will be delivered over three years and most have planning consent. 2

3 18 January 2018 Watkin Jones plc Looking into 2018, all 10 planned developments (3,415 beds) scheduled for delivery ahead of the 2018/19 academic year have been forward sold and provide the company with excellent visibility. The 2019 position is also strong with around two-thirds of the company s planned developments already forward sold (five developments; 2,675 beds). In addition, the company has secured an additional eight sites (3,030 beds) for proposed development between 2019 and BTR development Build to rent (BTR) 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, and institutional investor demand for residential exposure. The business is very well positioned to take advantage of continued rising demand for developments within the BTR sector. The company aims to operate along the same lines as its PBSA business, by developing a strong pipeline and forward selling to institutions thereby de-risking the development pipeline. We think the growth opportunity could be significant in the medium term. BTR is a key part of Watkin Jones' overall growth strategy. Its first 322 unit development in Leeds completed in the financial year. The BTR development pipeline is growing with five sites secured (four owned and one which it has exchanged contracts to acquire) and ongoing negotiations for several other development opportunities, from which the group is targeting to develop 1,500 units between 2018 and 2022 (subject to securing the remaining necessary planning consents). 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 BTR development opportunities. The company intends to continue to progressively grow within the BTR 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 BTR projects. Accommodation management The company offers accommodation management services in both PBSA and BTR with Fresh Property Group. The two brands Fresh Student Living and Five Nine Living now operate under one leadership. The business continues to progress in line with expectations with the total number of beds under management increasing by 30% over the past year (16,082 beds) across 52 schemes for 2017/18. The company's Fresh Student Living business (Fresh) is one of the leading independent PBSA managers in the UK. It offers vertical integration for the company within the student accommodation market and 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. 3

4 Watkin Jones plc 18 January 2018 Beds under management for 2017/18 are 16,082 across 52 schemes. We forecast the company to manage 20,000 beds by FY2020. We believe the Five Nine medium term growth opportunity in this space is significant. It is currently contracted to manage 535 units across five schemes. For 2017, revenues were 6.1m and the gross profit was 3.8m (62% gross margin). The business achieves a very attractive gross margin of circa 60% and we see this as sustainable. The property management businesses require little working capital. Watkin Jones' strategy is to continue to grow the number of beds under management in property management. Operationally, it has the capacity to expand to 30,000 beds under management without the need for any further significant investment in its operating platform. Residential Revenues for the residential development business were 18.1m, down from 26.3m in The gross margin improved by 520bps to 16.7% reflecting the impact of a lower level of nil margin sales in the year from legacy development sites. Looking forward we expect to see a greater contribution from the residential development business as more profitable sites are developed. Management Mark Watkin-Jones, the current CEO will be stepping back from his role. Watkin Jones has excellent visibility and a strong platform from which a successor can further grow the business. That said, it is apparent that the hand-over process will not be rushed. The development programme All 10 PBSA developments for completion in 2018 have planning consent and are forward sold, and therefore 2018 offers very high visibility. This equates to 3415 beds. The company has already forward sold five PBSA developments for delivery in 2019 (2,675 beds). An additional eight sites (3,030 beds) have been secured and are targeted for delivery during 2019 to Summary We continue to regard the fundamental drivers for Watkin Jones as positive. From an asset perspective, institutional demand for both student accommodation and BTR 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 senior team and a strong balance sheet, in our view the premium rating is deserved given the growth opportunity. 4

5 18 January 2018 Watkin Jones plc Valuation Given the business model a PER and Dividend Yield based valuation technique appears logical to us. This also helps take account of the fact that it has a strong forward sold position and asset management divisions. The stock trades on a September 2018 PER of 14.0x falling to 13.0x in 2019, with a forecast 2018 dividend yield of 3.5%. For investors who bought at the IPO price of 100p the current dividend yield on acquisition is 6.6%. At present, the housebuilding sector trades on an average PER for 2018 of 9.8x. Whilst the sector enjoys reasonable visibility, it is not the same degree of visibility that Watkin Jones enjoys, and this company has the added growth opportunities within BTR and property management. Whilst some traditional Housebuilders also have BTR opportunities, it represents a smaller opportunity relative to the overall size of the business. Watkin Jones currently trades at a 39% premium to the sector on PER but we would argue that this is justifiable 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. 5

6 Watkin Jones plc 18 January 2018 Income Statement Y/e 30 Sept, m E 2019E Revenues Student Accom % change 9.1% 3.9% 8.0% 9.3% 0.0% Buy to Rent Accom. Mgt % change 0.0% 0.0% 117.0% 17.0% 0.0% Residential % change -11.6% 67.7% 42.5% -8.0% 13.0% Total Revenue % change 4.6% 9.3% 13.1% 13.4% 16.5% Gross profit % margin 18.0% 20.1% 21.0% 19.9% 18.8% Gross Profit Student Accommodation margin % 18.2% 20.5% 22.07% 20.0% 19.2% BTR Fresh (Student Living) margin % 0.0% 58.9% 62% 60.0% 60.0% Residential & Other margin % 15.8% 13.2% 6.4% 15.2% 20.0% Central Overheads Depreciation & Amortisation Operating Profit % margin 13.3% 14.2% 14.1% 13.5% 12.8% Interest JV's Exceptionals Reported PBT PBT Tax Tax rate % 19.1% 20.6% 20.0% 20.0% 20.0% Reported PAT PAT Number shares (diluted) m EPS p % change 141% 18.8% 13.0% 4.8% 7.3% DPS p DPS growth % 65.2% 11.1% 7.3% Dividend Yield % 1.9% 3.2% 3.5% 3.8% Dividend Cover x Source: Company data and ED forecasts 6

7 18 January 2018 Watkin Jones plc Cash Flow Y/e 30 Sept, m E 2019E Operating Profit Depreciation & Amortisation EBITDA Working Capital Other Operating Cash Flow Net interest JV Income Tax Net Operating Cash Flow Investments Capex Free Cash Flow Acquisitions / Disposals Cash Flow before Financing Equity Borrowings Dividends Pre-IPO Dividend Net Finance Lease Cash Flow Cash at start of year Cash Flow Cash at end of year Total Debt (Incl finance leases) Net Debt / Cash Source: Company data and ED forecasts 7

8 Head of Corporate Gilbert Ellacombe Direct: Tel: Investor Access Hannah Crowe Justin Langen 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