Watkin Jones plc. Another cracking year. Don t throw the baby out with the bathwater YTD share price performance vs UK homebuilders

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1 Watkin Jones plc Another cracking year 31st October, 2018 After nearly a decade of bull market gains, investors suffered an abrupt wake-up call in October due to fears of rising US interest rates, tightening monetary policy, trade tariffs, slower global growth, valuations and Italian nationalism. However despite these worries, spreads on US corporate BBB (at 1.5%) & junk (3.7%) bonds vs Treasuries have remained relatively stable, indicating to us that the turbulence is probably little more than a healthy correction. What is more this volatility is throwing up bargains, especially within the UK house builders, which are down -20% YTD, compounded by further over-reactions with regards to Brexit and house price deflation. Putting the sector on attractive P/B, PE and dividend yield multiples of 1.4x, 8.2x and 6.4% respectively YTD share price performance vs UK homebuilders 10% Company Data EPIC AIM:WJG Price (last close) 200p 52 week Hi/Lo 249p/178p Market cap 511m ED valuation/share 235p Daily volume 300k Share Price (p) 250p 230p 210p 190p 170p Watkin Jones Sector 150p 5% 130p 110p 0% -5% Watkin Jones -9% 90p 70p 03/16 06/16 09/16 12/16 03/17 06/17 09/17 12/17 03/18 06/18 09/18 Source: Web Financial -10% Company Description -15% -20% Housebuilding sector -20% -25% 2/1/18 2/2/18 2/3/18 2/4/18 2/5/18 2/6/18 2/7/18 2/8/18 2/9/18 2/10/18 Source: Equity Development Don t throw the baby out with the bathwater Ok, but what to buy? Well, this depends on one s risk tolerance and financial objectives - albeit we think there are interesting stocks for even the more cautious investor. Enter Watkin Jones - a tier 1 developer/manager of purpose built student accommodation (PBSA) and build to rent (BTR) properties - who this morning said it had finished 10 PBSA (10 LY) developments covering 3,415 beds (3,314 LY) during FY18. Delivering record results which were slightly ahead of expectations (New ED Adj PBT 48m vs 46m before, & up +15% on LY 41.8m). Why? Well, first & foremost the fundamentals remains strong. This is characterised by strong occupier demand for quality, yet affordable, University & rented accommodation all forward funded from a host of premier development partners such as KKR, Roundhill, AIG, Arlington, Brookfield, CBRE, L&G, La Salle, M&G, UBS & UPP. Watkin Jones is a tier 1 developer & manager of large scale, multi occupancy accommodation, focusing on purpose built student accommodation (PBSA) and residential build to rent (BTR). Both areas are expanding, supported by strong fundamentals enabling the firm to leverage its reputation & industry expertise, along with operating a forward sale, low risk, cashflow positive and capital light model. Residential property & agency lettings businesses are also set to become growth engines. Next news: Prelims Tuesday 15th January 2019 Paul Hill (Analyst) paul.hill@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 31st October 2018 Excellent visibility over future turnover and profits Indeed altogether we estimate WJG has solid visibility over the majority of its revenues and gross profits for the next 2 years. Supported by a secured PBSA pipeline of 2,723 beds for FY19 (6 schemes; 5 fwd sold) and 2,606 in FY20 (7 sites; 4 fwd sold) with 4 further sites (2,189 beds) in FY21 possessing planning permission. Likewise, WJG continues to make good progress in BTR sporting 7 schemes with building consent, which are scheduled for delivery between FY19-22 covering 1,500 apartments. Elsewhere, there are said to be several other opportunities either in legal negotiation or under offer. Outlook for PBSA remains positive Importantly too, the wider higher education sector remains healthy. For the 2018/19 academic year, total student numbers are predicted to have risen again (see below), of which >1m live in 3 rd party rented accommodation. Consequently, irrespective of the slight dip in the number of UK 18 year olds (re demographics), we reckon universities should be able to fill most (if not all) their courses, given overall applications still out-strip places available. PBSA demand continues to exceed supply 2,000 1,800 1,600 1,710 1,728 1,730 1,771 1,827 1,855 1, % 21.5% 22.0% 21.0% 1, % 20.5% 20.0% 1,200 1, % 18.5% 19.0% % % % FY12-13 FY13-14 FY14-15 FY15-16 FY16-17 FY17-18 Est18-19 Full time students 1st Year & overseas PBSA beds % 2nd & 3rd years in PBSA 16.0% Source: UCAS, HESA, Unite estimates In terms of PBSA, there are c.615k beds in the UK - split approx 50:50 university vs corporately owned - with another 20k coming on stream this year, compared to 750k 1st year and international students. Similarly this modest volume expansion should be readily absorbed - augmented by increasing numbers of students (up >1/3rd in 10 years) opting for post-graduate courses, alongside many 2nd & 3rd year undergrads also choosing PBSA in preference to traditional digs. Capital-lite model offers further upside at lower risk Another key point is WJG s best-in-class asset turns (2.3x vs sector 1.3x), RoE (24.7% vs 17.3%) and cash generation. In fact we calculate the company closed Sept 19 with net 2

3 31st October 2018 Watkin Jones plc funds of c. 60m (or 23p/share). Mirroring its capital-lite model, and assisted by a oneoff 4m payment from the Curlew Student Trust, relating to early termination of a lettings contract and partner carried interest. Equally from a risk perspective, we believe earnings can climb even in the event of a dip in the UK property market. Politicians on both sides of the House are supportive too - vowing to end Britain s housing crisis after years of under-investment, which should be beneficial for WJG s (albeit smaller) home building interests. Here it completed 175 sales (94 LY), comprising a mix of houses and apartments across the North West. 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 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 7.2% 17.3% 19.4% 11.1% 18.5% 15.7% 20.8% 17.2% 19.1% 12.5% 14.1% 15.1% 12.8% 17.5% 23.6% 24.7% 27.5% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Source: Equity Development, 3

4 Watkin Jones plc 31st October 2018 Ok, so what else came out of today s update? Ahead of its prelims on Tuesday 15 th January, the Board continues to assess various options for establishing a BTR investment vehicle with a strategic partner. We suspect that WJG would retain a minority stake, but could nonetheless generate 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 projects, to be agreed on an arms length basis. Elsewhere the Fresh lettings business closed the year with 15,421 student beds (16,617 LY) and BTR apartments under management across 56 schemes (57 LY), of which 52% were not constructed by WJG. The decline in units was primarily caused by the loss of 4,597 beds following the sale of the Enigma property portfolio by the Curlew Student Trust. Albeit partly offset by being appointed on 14 new schemes for the 2018/19 academic year, resulting in a net drop of only 1,196. Finally, incoming CEO Richard Simpson is scheduled to start on 2 January Richard will be joining from Unite Group plc, the FTSE250 manager and developer of PBSA, where he was Group Property Director. Valuation ticks up to 235p (vs 230p before) With regards to the numbers, we make no change to our FY19 forecasts, but nudge up the valuation to 235p/share thanks to the stronger than expected progress. At 200p, the stock trades on FY19 PE & EV/EBIT multiples of 12.4x and 8.7x, along with offering a 4.0% dividend yield. In our view, a deserved premium to peers in light of its superior cash generation, asset efficiency, sales visibility and risk profile. The Board commenting WJG continues to maintain excellent visibility over future revenues and earnings, supported by the pipeline of forward sold and secured sites for the student accommodation division. The Group s success in securing the significant BTR development agreements for the schemes in Reading and Wembley in the Period, together with the pipeline of sites which the Group has secured, is highly encouraging. In addition, the Group s residential and accommodation management divisions are well positioned to contribute to progressive growth in earnings. As a result, we remain confident in the future outlook for the Group. 4

5 31st October 2018 Watkin Jones plc Summary financial projections Watkin Jones (continuing) 2015 Act 2016 Est 2017 Act 2018 Est 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% 15.9% 11.4% 11.0% 10.6% 10.6% 8.7% 8.0% Student (PBSA) accommodation 3.9% 8.0% 11.3% 0.0% 3.5% 1.7% 0.0% 0.0% 0.0% Build to Rent (BTR) % 185.7% 50.0% 38.9% 36.0% 23.5% 19.0% Residential development -12.6% 65.3% -31.3% 104.7% 2.7% 5.3% 12.5% 11.1% 10.0% 9.1% Fresh property management 116.6% 14.3% 0.0% 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% 20.1% 19.3% 18.4% 17.7% 17.4% 17.1% 17.0% Student (PBSA) accommodation 18.2% 20.5% 22.1% 20.0% 19.5% 18.7% 18.0% 18.0% 18.0% 18.0% Build to Rent (BTR) 56.3% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% Residential development 16.6% 11.5% 3.8% 15.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% Fresh property management 58.9% 49.4% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% Admin Distribution / other Adjusted EBIT % margin 13.3% 14.2% 14.1% 13.9% 13.3% 12.6% 12.2% 12.2% 12.2% 12.2% EBITDA (incl JV profits) % margin 13.8% 15.6% 15.0% 14.4% 13.6% 13.0% 12.5% 12.5% 12.5% 12.5% Profit from JVs Net interest Adj profit before Tax (Ex JVs) Effective tax rate -19.1% -20.5% -17.3% -19.0% -19.0% -18.0% -17.0% -17.0% -17.0% -17.0% Adjusted EPS (pence) EPS growth rate 138.5% 19.2% 13.1% 8.7% 6.1% 7.1% 8.2% 10.6% 8.9% 8.3% Net tangible assets per share (p) Dividend (p) Valuation benchmarks P/E ratio Price/Tangible book P/NTAV (adjusted for sector average NTA turns) Return on equity (EPS/NA) 23.5% 30.8% 28.4% 26.6% 24.7% 23.4% 22.5% 22.1% 21.5% 20.9% Dividend yield 2.0% 3.3% 3.7% 4.0% 4.3% 4.7% 5.2% 5.6% 6.1% Net cash/(debt) Sharecount (Ks) 255, , , , , , , , , ,869 Shareprice 200 Source: Company historic data, Equity Development estimates. 5

6 Watkin Jones plc 31st October 2018 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. 6

7 Head of Corporate Gilbert Ellacombe Direct: Tel: 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