Residential for rent developer and manager Watkin Jones traded strongly in H1 but faces inevitable disruption on its student housing and build-to-rent developments, according to last week’s pre-close update. However, we believe its established defensive qualities are demonstrated by its net cash position, forward sold position and ‘capital-light’ model. Although it has withdrawn guidance, we believe it is strongly placed to return to growth when the virus abates and could exploit widespread land opportunities.
H1 trading remained strong: The H1 pre-close statement and C-19 update confirmed that trading remained strong in the six months to 31 March, with revenue and earnings in line with its expectations. All four divisions “performed well” with the pipeline of future sites growing and only an impact on sites near the end of March.
Impact of Covid-19. All non-essential work on sites has been halted. This will “inevitably impact financial performance” but we believe sites can restart quickly once the lockdown ends and there is a supportive forwardsold pipeline of over two years. The Board has withdrawn guidance but will reinstate it as soon as stability returns.
Liquidity strong. At 31 March the group had gross cash of £71m before site-specific loans of c. £36m. It has a £60m RCF to “primarily support land and development opportunities”. It is to take a non-underlying provision to potentially fund previously announced remedial action on cladding.
Defensive growth model: We intend to formally initiate on Watkin Jones in due course, highlighting potential scenarios during and after the current lockdown. We believe the company offers exposure to long-term growth markets in student accommodation, build to rent (BTR) and accommodation management, with strong relationships with residential investors, allied with a low-risk and ‘capital light’ business model.
Economic fall-out could present land opportunities. We believe the likely economic impact of Covid-19 could force many land owners to sell assets at attractive prices. Moreover, we believe, any disruption to the housing market could catalyse demand for institutional grade BTR accommodation