Zeus Capital Analyst Andy Hanson discusses Watkin Jones Group PLC LON:WSG “Today’s HY16 results indicate that the business has continued to move forward since the IPO (23rd March). Earnings visibility out to FY18 is high and on the back of today’s results we are confident that FY16 expectations of £39.5m PBT will, at the very least be met. In addition, sites are beginning to be secured for FY19 and beyond, underpinning Watkin Jones’ forward sales model. Revenue growth in the important core student accommodation development division in H116 grew 25.9% with the gross margin increasing 310bps to 17.9% (HY15: 14.8%). At the group level, revenue increased 40.6% with Student Development growth supplemented by an increase in Residential and Commercial revenue. The gross margin of 16.1% is a 140bp improvement yoy, providing additional evidence of the natural progression in margin, as legacy low margin construction contracts are exited. The current valuation of 9.3x FY16 earnings and 5.5% prospective FY17 dividend yield is not reflective of the strong visibility on the c.20% growth in profit, and remains a material, c.35%, discount to peers. Forecasts remain unchanged on today’s results but the outlook for the FY remains favourable.
- On course for FY16 expectations with interim results highlighting the ongoing operational improvements: FY16 forecasts assume 10.9% growth in revenue resulting in 21.8% earnings growth as low margin legacy contracts are exited. This results in a 150bp yoy improvement in gross margin to 19.5% for FY16. The achieved 140bp improvement in H1 includes a 310bp improvement in the Student Development margin and with the weighting in H2 increasing towards this area, which has high forward visibility, expectations for FY16 appear underpinned.
- High earnings visibility increasing: Confidence can be taken that the nine student developments for completion in the current year are on track and should be finished in the next few weeks, well ahead of the new academic year. In FY16 to date, six developments have been forward sold with one, due for completion in FY18, forward sold since the IPO further increasing the certainty on earnings across the forecast period. Importantly Watkin Jones is continuing to build its pipeline for outer years with five new sites receiving planning permission since March.
Valuation will increase on multiple expansion: Forward selling sites to institutional investors reduces risk and provides a high degree of earnings visibility. As the pipeline is built out beyond the forecast period and margins maintained investors will become increasingly confident in management’s ability to sustainably execute its strategy.”
