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You need Watkin Jones in your portfolio
Decent earnings visibility on student accommodation builder Watkin Jones’ (WJG:AIM) means its shares are too cheap.
The company’s March 2016 IPO (initial public offering) saw the largest fundraising on AIM in two years at £131m. Furthermore, maiden financial results as listed company were very good.
Operating profit for the year to 30 September 2016 increased by 16.7% to £37.9m excluding one-off costs mainly associated with its IPO.
Making substantial progress
Since the financial year end, the company has announced the forward sale of five developments. Broker Zeus Capital estimates 70% of the current financial year’s expected profit has already been secured by forward sale projects.
Analyst Andy Hanson says: ‘Across the forecast period, Watkin Jones has currently secured circa 9,500 beds across 27 sites; 61.6% of these beds have been forward sold.’ He says this figure increases to 87.2% when including beds that have planning consent.
‘Assuming an annual delivery of 3,500, securing a further 1,000 beds for delivery in the year September 2019 would mean visibility on 100% of the beds due for completion across the forecast period.’
Despite the confidence this provides in earnings forecasts, the company trades on a prospective price-to-earnings ratio of 9.5 (too low, in our view). It also offers an attractive 4.8% prospective dividend yield.
The dividend also looks fairly safe when you consider the company’s position. It is sitting on more than £30m net cash and has £50m of new bank lending facilities.
It also generated operating cash flow before IPO costs of £41.7m in the September 2016 financial year, up from £28.4m a year earlier.
A ninth-generation family-run business, Mark Watkin Jones is the current chief executive. Family businesses are often considered to be attractive to investors because typically they have an emphasis on the long-term; they are disciplined with their capital; and they tend to have a strong and consistent corporate culture.
The company recently stepped out from its student focus to build a position in the private rental sector but the CEO is keen to emphasise to Shares the positive fundamentals which continue to underpin student flat market.
He notes Brexit is unlikely to have too much of an impact given only around 7% of the student population in the UK comes from the European Union (EU), while weak sterling could make the UK an attractive destination for non-EU students.
The company’s Fresh Student Living arm is a growing student accommodation platform through which it plans to operate 18,000 student beds across the UK by 2020.
Snap up the shares at 130p.