Q&A with Andy Hanson Equity Research Director at Zeus Capital

Zeus Capital Equity Research Director Andy Hanson caught up with DirectorsTalk to discuss Watkin Jones PLC (LON:WJG)

 

Q1: Watkin Jones announced the forward sale of two properties today, what does that mean for the business?

A1: The forward sale of the properties is really business as usual, Watkin Jones basically goes out and finds sites and then going to planning permission and then it looks to do a batch back sale when it gets planning permission and effectively forward sell the development to an institutional investor. Watkin Jones will then actually build and develop the plot so it’s very much in keeping with Watkin Jones’ strategy.

 

Q2: So what’s the relevance for investors?

A2: The two properties we’re talking about, one in Cardiff and one in Belfast, were already in our forecast so there’s no change in our forecast but what it does do is it increases the visibility on earnings in FY17. FY16 ended in September so we’re a couple of months into FY17, the forward sales nature of Watkin Jones’ model means it has great visibility so even though we’re only 3 months into the financial year I estimate that 65% of gross profit has already been secured for the current financial year.

 

Q3: How does the business look on valuation?

A3: The business is going to market in March so it hasn’t been listed for too long and I think that is reflected in the multiple. So we had a trading statement recently saying FY16 was in line with expectations so if we look forward at FY17 numbers you’ve got to remember that we’ve got that great visibility and it’s at FY17 already, the stock’s trading on a single digit p, less than 9 times and it’s also yielding over 5% of it at the current level. I would imagine as the markets get used to Watkin Jones’ business model and the great visibility that it sees you can see that 9 times multiple increasing to double digits to 12 or 13 times.

 

Q4: I think you touched on this but is there a decent yield?

A4: Yes, there is. As I said, the current yield is over 5% but what I would say on the yield is the business has a very strong balance sheet so I’m forecasting over £30 million of net cash for FY16. So on an earnings basis the dividend’s twice covered but when you actually look at the net cash on the business it’s more than twice covered with no sort of gearing risk. You’ve got great visibility on that dividend and they will grow it and potentially if they continue to generate cash as they have done historically there will be a point in time when Watkin Jones will have to look to do something with that cash and that could potentially mean a buy-back or a return of capital by way of special dividend to investors.

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