Watkin Jones has reported a robust set of interim results with PBT, EPS and DPS coming in ahead of our expectations. This company operates in two of the hottest areas of residential real estate, namely purpose-built student accommodation (PBSA) and build to rent sector (BTR) and it operates a lower risk model. Therefore we believe it should trade at a bigger premium to other housebuilders.
The company produced another strong set of results during H1. Despite an expected 8.4% decline in H1 revenues, significant margin gains drove a 23.8% increase in gross profits. Adjusted PBT rose 26.6% to £21.1m; EPS +28.8% to 6.7p. The company reported an interim DPS of 2.2p.
The company's largest division reported strong profit growth H1 with a significant increase in gross margins. Visibility of sales and earnings is very high in this division. It is set to have a very good second half with growth in revenues and margins YOY.
Fresh Student Living continues to grow its number of beds under management. It currently has 12,117 beds under management and this is set to grow to 19,532 by 2020.
The company completed its first BTR development in Leeds in the period. With a site with planning secured in Sutton and two further sites progressing through planning, we believe the medium term opportunity within this space is significant.
The newest part of the group, Five Nine manages the Leeds scheme and currently has 535 BTR units under management.
Watkin Jones’ shares trade on 14.1x PER for September 2017 with a 3.5% dividend yield. For the following year the PER falls to 12.9x and a yield of 3.8%. This appears 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. 14.1x represents a 35% 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.