Looking at expected ungeared ROIs, Watkin Jones, a UK developer / manager of large scale, multi occupancy accommodation – ranks as the best ‘money making machine’ out of the entire UK property universe. Derived from sustainable secular tailwinds (eg student & Build-to-Rent), a forward funded model, high asset turns, low cost base and leading industry expertise.
Encouragingly, this morning the company said that trading for the 6 months ending March 2019 was “good” and importantly “in line with its expectations”. In fact, it was pleasing to hear that not only was WJG’s bread-and-butter PBSA (>70% of gross profits) powering along at a fair rate of knots - sporting a “secure development pipeline of >7,500 beds across 17 sites” (worth circa £650m). But also the group’s new growth engines of BTR, property management and (to a lesser extent) house building were making great strides too.
Additionally from a macro perspective, yields of late on WJG’s core asset classes have become more attractive (see below) to investors vs traditional ‘safe havens’ like government bonds (eg German bunds & JGBs at 0%). Where several central banks have walked back their previous ‘relatively hawkish’ stances on interest rates and quantitative tightening.
Picking through today’s numbers in more detail - of the 17 PBSA schemes, 11 (5,334 beds) have been forward sold, with all 6 slated for completion in FY19 (2,723 beds) being on track for the start of the 2019/20 academic year. Elsewhere, institutional investors continue to descend on the nascent yet “burgeoning” BTR market.
Consequently we make no change to our forecasts, but lift the SOTP valuation to 250p/share (from 240p) based on the natural roll-forward of the discount rate and de-risking of the FY19 numbers. In our opinion, WJG continues to trade at a deserved premium to peers in light of its superior cash generation, asset efficiency, sales visibility and risk profile.
