Zeus Capital Equity Research Director Andy Hanson caught up with DirectorsTalk for an exclusive interview to discuss Watkin Jones PLC (LON:WJG)
Q1: So we’re talking about Watkin Jones Group today, can you tell me what’s different about the Watkin Jones Group model, isn’t it just a normal developer?
A1: When you compare it to a listed company it is quite a different model, just because it doesn’t own the land itself so it effectively goes out, pays a deposit to take an option on a piece of land, goes and gets planning permission and once it has planning permission it will then forward-sell the land to an institutional investor and then begin construction. So in this way, it is very capital efficient because it doesn’t have a large land back and that also makes the business model very very cash generative.
Q2: Ok, so where is its focus at the moment and why?
A2: Well over the last few years, basically since the financial crisis, it’s been focussed on the student accommodation market because of the structure of growth dynamics of that market. The current student accommodation’s housing stock is going past its best, universities have changed in funding model, universities are becoming less interested in investing in their housing stock, they don’t see it as a core activity, obviously the academic side of the university is their core activity, and they are beginning to feel more comfortable with third party providers building purpose-built student accommodation. So not only have you had this structural drive of more students going to university, you’ve also had universities less willing to provide their own accommodation so it’s been a really good market over the last sort of 5-10 years and it’s a growing market.
Q3: If the UK leave the EU, I’m talking Brexit now, is there risk to the company?
A3: Well, on the face of it there is because currently there’s about 5% of the UK student population is from the EU, the new students benefit the same way UK students do, they’re not treated the same way as international students outside of the EU that pay much higher fees, so in theory, if the UK come out the EU students’ funding dynamics would change dramatically. I think in reality what would happen they would come to some sort of agreements with the EU and let’s say for instance that EU students did start getting charged a lot more and so numbers started falling, UK universities would go and try and source more students from outside the EU and that’s something they’ve done very successfully over the last 10/15/20 years. So whilst I don’t discount the risk, I think over time universities would be able to mitigate any damage and therefore the impact on companies like Watkin Jones would be minimal over the medium to longer term.
Q4: So what’s next for Watkin Jones Group?
A4: Well I think the next interesting area is the private rented sector and they’ve already stated their intention to get into it, they’re starting to build a block of purpose-built flats and it’s going to be first step into it. We’ve had a lot of comments from people like Grainger who wanted to come and get more involved in this sector and see there’s another structural growth dynamic over the next 5-10 years.
Q5: What can you tell me about its forecast visibility and risk?
A5: The interesting thing with Watkin Jones and the model that it runs is that forecast’s over the next 2-3 years you’ve got a great deal of tangibility because they forward sell their projects so putting that in context, gross profits for 2016, to September 2016, I think they’ve got some more than 90% of that covered already so it gives investors a great deal of confidence in the numbers going forward. Obviously they need to replace their pipeline but the company only aims to do between 8 and 10 projects a year so you’re not looking to fill a huge amount of new opportunity so forecast will be relatively minimal over the next 2-3 years.
Q6: What’s your valuation of the company?
A6: Currently the shares list is a pound and they look about 70 cents since the IPO and they continue to trade on less than 7 times PE on the current year and considering the confidence we have with those numbers, that looks pretty low for the 25% discount to other construction services companies. On top of that, management stated their intention to pay a 6% yield when it came to market so we do look forward to full year 2017, the perspective yield’s still 5.9% which is very attractive so all in all I think you could say that the valuation remains attractive and that is supported by the business having net cash of about £36 million at year end.
