Watkin Jones plc

On track for another record year 5 April, 2018

At present there is a sharp difference of opinion on the future direction of UK property Company Data prices. In one corner, a handful of vociferous media pundits are calling for an eminent EPIC AIM:WJG correction. Whilst in the other, many expert fund managers are ploughing literally Price (last close) 182p £billions of fresh money into this resilient sector. You can see why, too. 52 week Hi/Lo 249p/154p Market cap £465m According to 4 esteemed economists (Jorda, Knoll, Kuvshinov, Schularick, and Taylor), ED valuation/share 225p UK housing delivered average real returns (net inflation) of 5.6% p.a. between

1870-2015 and 6.8% since 1980 – split roughly 60:40 capital:rental – vs 2.8% and 4.7% pa respectively for bonds. Better still, when included within a basket of 16 major Share Price, p

OECD countries, residential property has also been considerably more stable than 300p equities. Never failing to increase in value over a 5-year period, and generating 250p the highest risk-weighted gains of any asset class. 200p

150p

Continued demand for student accommodation… 100p

Sure, certain well-heeled Central London neighbourhoods have been experiencing price 50p deflation of late. Yet for Watkin Jones’ bread-and-butter of supplying purpose-built 0p 03-16 07-16 11-16 03-17 07-17 11-17 03-18 student accommodation (PBSA), conditions remain buoyant. Underpinned by Source: DigitalLook favourable demographics, healthy capital inflows and robust demand from international students (eg from China & India) who typically seek quality living space. Company Description The latter being further boosted by President Trump’s decision this year to issue far fewer Watkin Jones provides the end-to- overseas visas in the US. end development and management of large scale, multi occupancy … on top of attractive prospects for BTR accommodation, focusing on purpose built student Looking ahead we expect these trends to be sustained, and believe similar accommodation (PBSA) and dynamics are taking root in the fledgling residential Build-to-Rent (BTR) market, residential build to rent (BTR). principally aimed at young-City dwellers. Here, the firm sees scope to leverage its respected brand and technical expertise, along with forward selling their multi Both are expanding areas with occupancy developments to yield-hungry institutional investors. attractive fundamentals – enabling the firm to leverage its reputation Ok, so how is the business performing? and industry expertise, along with operating a low risk, cashflow Well, this morning the Board released a positive trading statement for the 6 months positive and capital light model. ending March 2018, adding that demand remains strong, and H1 results (due on Residential property and agency 22nd May) would be in line with FY18 expectations. lettings (Fresh brand) are also set to In terms of specifics, WJG has a development pipeline of >9,800 student beds (vs be long-term growth engines.

9,120 Sept’17), of which around 8,300 (or 85%, up from 7,497 at y/e) possess planning Next news: Interims, 22 May permission. All sites due for delivery this academic year (3,415 beds) have been forward sold with another 5 (2,675 beds) slated for 2019/20. Thus providing solid forward Paul Hill (Analyst) visibility. 0207 065 2690 For BTR, 3 sites secured planning in H1, located in Bournemouth, Sheffield and Sutton – [email protected] lifting the total consented pipeline to ~700 units. On top, another significant development in Uxbridge is progressing well - with the group now controlling 5 BTR Hannah Crowe schemes and in constructive negotiations on several others, from which it expects to 0207 065 2692 deliver over 1,500 units during the next 5 years. [email protected]

Please refer to the important disclosures shown on the back page and note that this information is Non-independent and categorised as Marketing Material Watkin Jones plc 5 April, 2018

With regards to the numbers, we make no change to our forecasts, supported by circa 80% GP cover (ED estimate) for FY18. We calculate the stock is worth 225p/share - representing a deserved premium to peers (see below), thanks to its superior RoE, lower risk profile, robust cashflows and exposure to numerous secular trends. In fact, looking at the big picture in light of the tailwinds, we reckon the group should be able to more than double revenues over the next 6-7 years.

Strong future returns expected for shareholders

CEO Mark Watkin Jones commenting “I am delighted with the Group’s performance in the period. The outlook for the UK PBSA market is positive and demand for our high- quality product remains strong. Fresh Property Group (FPG) continues to be successful in securing new contracts and, from the start of the 2018/19 academic year, is contracted to manage over 14,000 beds.”

As indicated at the prelims in January, the Curlew Student Trust has decided to sell its ‘Enigma’ portfolio, comprising 5,124 beds, to a 3rd party which operates its own in house lettings platform. As a result, the existing ‘full service’ contract with Fresh is set to terminate at the end of Apr’18, with compensation being paid for any outstanding term. That said, the successful launch of Curlew Student Trust 2 (‘CST2’), a similar investment vehicle focused on UK PBSA for which FPG is the preferred agency, offers a rich seam of possible future property work.

Elsewhere, “We continue to make solid progress in the build to rent sector, and will update the market as these opportunities progress. Given the encouraging start to the financial year, we believe our business model will continue to deliver strong returns to shareholders”.

Rated at a justified premium to the sector

Current year Return on Equity (RoE) vs peers

Sector average 17.7% Berkeley 17.6% 20.5% McCarthy & Stone 10.3% 16.3% Watkin Jones 26.4% 22.0% 20.8% Redrow 20.6% Bovis 12.3% Barratt Devs 14.6% Persimmon 23.2% Springfield Props 12.3% Henry Boot 12.9% Gleeson 15.9% Countryside 19.3%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

Source: Equity Development (RoE defined as EPS/NA)

2 www.equitydevelopment.co.uk 5 April, 2018 Watkin Jones plc

CY ‘Price: net tangible assets (NTA)’ vs peers

Sector average 1.7

Berkeley 1.9

Bellway 1.5

McCarthy & Stone 1.1

Telford Homes 1.2

Watkin Jones 3.2

Taylor Wimpey 1.9

Crest Nicholson 1.4

Redrow 1.5

Bovis 1.5

Barratt Devs 1.5

Persimmon 2.4

Springfield Props 1.6

Henry Boot 1.4

Gleeson 2.1

Countryside 2.0

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

Source: Equity Development

CY PER vs peers

Sector average 9.7 Berkeley 10.5 Bellway 7.4 McCarthy & Stone 9.4 Telford Homes 7.2 Watkin Jones 12.1 Taylor Wimpey 8.8 Crest Nicholson 6.5 Redrow 7.3 Bovis 12.1 Barratt Devs 8.2 Persimmon 9.8 Springfield Props 13.2 Henry Boot 10.7 Gleeson 12.9 Countryside 9.4

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

Source: Equity Development

CY EV/EBIT vs peers

Sector average 7.6 Berkeley 8.2 Bellway 5.8 McCarthy & Stone 7.1 Telford Homes 8.8 Watkin Jones 8.9 Taylor Wimpey 6.5 Crest Nicholson 4.7 Redrow 6.1 Bovis 8.7 Barratt Devs 6.1 Persimmon 6.7 Springfield Props 10.9 Henry Boot 8.5 Gleeson 9.7 Countryside 7.3

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

Source: Equity Development

www.equitydevelopment.co.uk 3 Watkin Jones plc 5 April, 2018

CY Dividend yield

Sector average 4.8% Berkeley 4.8% Bellway 4.5% McCarthy & Stone 3.9% Telford Homes 4.5% Watkin Jones 4.1% Taylor Wimpey 8.1% Crest Nicholson 7.7% Redrow 4.1% Bovis 5.0% Barratt Devs 6.1% Persimmon 6.4% Springfield Props 3.1% Henry Boot 2.9% Gleeson 3.8% Countryside 3.3%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0%

Source: Equity Development

4 www.equitydevelopment.co.uk 5 April, 2018 Watkin Jones plc

Summary financial projections

Watkin Jones (continuing) 2015 Act 2016 Est 2017 Act 2018 Est 2019 Est 2020 Est 2021 Est 2022 Est 2023 Est 2024 Est (Sept yearend) £'ms £'ms £'ms £'ms £'ms £'ms £'ms £'ms £'ms £'ms

Turnover Student (PBSA) accommodation 228.2 237.2 256.1 280.0 285.0 295.0 300.0 300.0 300.0 300.0 Build to Rent (BTR) 0.0 0.0 1.2 20.0 60.0 90.0 125.0 170.0 210.0 250.0 Residential development 15.9 26.3 18.1 36.0 38.0 40.0 45.0 50.0 55.0 60.0 Fresh property management 2.8 6.1 7.0 7.0 8.1 8.9 9.7 10.7 11.8 Other / 0.2 0.7 20.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Total 244.2 267.0 301.9 343.0 390.0 433.1 478.9 529.7 575.7 621.8

Group revenue growth % YoY 73.5% 9.3% 13.1% 13.6% 13.7% 11.0% 10.6% 10.6% 8.7% 8.0% Student (PBSA) accommodation 3.9% 8.0% 9.3% 1.8% 3.5% 1.7% 0.0% 0.0% 0.0% Build to Rent (BTR) 1544.7% 200.0% 50.0% 38.9% 36.0% 23.5% 19.0% Residential development -12.6% 65.3% -31.3% 99.2% 5.6% 5.3% 12.5% 11.1% 10.0% 9.1% Fresh property management 116.6% 14.3% 0.0% 15.0% 10.0% 10.0% 10.0% 10.0%

Student (PBSA) accommodation 41.5 48.6 56.6 56.0 55.6 55.1 54.0 54.0 54.0 54.0 Build to Rent (BTR) 0.0 0.0 0.7 2.6 7.8 11.7 16.3 22.1 27.3 32.5 Residential development 2.7 3.0 3.0 5.4 7.6 8.0 9.0 10.0 11.0 12.0 Fresh property management 0.0 1.7 3.8 4.2 4.2 4.8 5.3 5.8 6.4 7.1 Other -0.1 0.5 -0.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Group gross profit 44.0 53.8 63.5 68.2 75.2 79.6 84.6 91.9 98.7 105.6

Group % margin 18.0% 20.2% 21.0% 19.9% 19.3% 18.4% 17.7% 17.4% 17.1% 17.0% Student (PBSA) accommodation 18.2% 20.5% 22.1% 20.0% 19.5% 18.7% 18.0% 18.0% 18.0% 18.0% Build to Rent (BTR) 56.3% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% Residential development 16.6% 11.5% 3.8% 15.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% Fresh property management 58.9% 49.4% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0%

Admin -10.6 -14.6 -20.8 -21.5 -23.5 -24.9 -26.1 -27.4 -28.4 -29.5 Distribution / other -1.0 -1.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Adjusted EBIT 32.5 37.9 42.7 46.7 51.7 54.7 58.5 64.6 70.3 76.1 % margin 13.3% 14.2% 14.1% 13.6% 13.3% 12.6% 12.2% 12.2% 12.2% 12.2%

EBITDA (incl JV profits) 33.6 41.5 45.2 49.4 53.0 56.0 59.8 65.9 71.7 77.5 % margin 13.8% 15.6% 15.0% 14.4% 13.6% 12.9% 12.5% 12.4% 12.4% 12.5%

Profit from JVs 1.2 3.0 1.4 1.5 0.0 0.0 0.0 0.0 0.0 0.0 Net interest -0.7 -1.0 -0.9 -0.9 -0.9 -0.9 -0.9 -0.9 -0.9 -0.9

Adjusted profit before Tax 32.9 39.8 41.8 45.8 50.8 53.8 57.6 63.7 69.4 75.2 Effective tax rate -19.1% -20.5% -17.3% -19.0% -19.0% -18.0% -17.0% -17.0% -17.0% -17.0%

Adjusted EPS (pence) 10.4 12.4 14.0 15.0 16.1 17.3 18.7 20.7 22.5 24.4 EPS growth rate 138.5% 19.2% 13.1% 7.0% 7.4% 7.2% 8.2% 10.6% 8.9% 8.3%

Net tangible assets per share (p) 44 34 44 57 65 73 83 93 104 116 Dividend (p) 4.0 6.6 7.5 8.1 8.6 9.3 10.3 11.3 12.2

Valuation benchmarks P/E ratio 17.5 14.7 13.0 12.1 11.3 10.5 9.7 8.8 8.1 7.5 Price/Tangible book 4.11 5.33 4.18 3.21 2.81 2.48 2.20 1.96 1.75 1.57 P/NTAV (adjusted for sector average NTA turns) 2.15 1.87 1.62 1.42 1.25 1.11 0.98 0.88 Return on equity 23.5% 30.8% 28.4% 26.4% 24.8% 23.5% 22.5% 22.2% 21.6% 20.9% Dividend yield 2.2% 3.6% 4.1% 4.4% 4.7% 5.1% 5.7% 6.2% 6.7%

Net cash/(debt) 39.1 32.2 41.0 50.6 60.9 71.9 83.8 97.1 111.5 127.1

Sharecount (Ks) 255,269 255,269 255,269 255,269 255,369 255,469 255,569 255,669 255,769 255,869 Shareprice 182 Source: Company historic data, Equity Development estimates.

www.equitydevelopment.co.uk 5 Watkin Jones plc 5 April, 2018

Key risks

 Impact of a substantial jump in UK interest rates and/or a recession. This seems unlikely though, given that even the most pessimistic economic forecasts are for >1.5% GDP growth through to 2022. Similarly, November’s 0.25% rate rise by the BoE has already been factored into our modelling.

 Protracted delays in obtaining planning consent, which traditionally has plagued the whole sector.

 Availability of skilled labour and associated resources at desired cost levels.

 Foreign exchange fluctuations could impact demand from international buyers, from say Singapore, Hong Kong and China.

 Being relatively small in, Watkin Jones could get squeezed by larger rivals, partners and customers, particularly with regards to residential. BTR and profit margins.

 Future access to funding at commercial rates, perhaps in the unlikely event of another banking crisis.

 Generic risks of retention/recruitment of key staff, etc.

 Acquiring land at affordable rates.

 Withdrawal of government support for house-building (eg H2B, FTBs, stamp duty, etc).

 Brexit, and other possible legislative changes, say concerning building regulations, affordable housing, ground rents, etc

 Less demand from institutional money, say if bond/gilt yields were to rise materially.

6 www.equitydevelopment.co.uk

Head of Corporate

Gilbert Ellacombe Direct: 0207 065 2698 Tel: 0207 065 2690 [email protected]

Investor Access

Hannah Crowe Justin Langen Direct: 0207 065 2692 Direct: 0207 065 2697 Tel: 0207 065 2690 Tel: 0207 065 2690 [email protected] [email protected]

Equity Development Limited is regulated by the Financial Conduct Authority

Equity Development Limited (‘ED’) is retained to act as financial adviser for various clients, some or all of whom may now or in the future have an interest in the contents of this document and/or in the Company. In the preparation of this report ED has taken professional efforts to ensure that the facts stated herein are clear, fair and not misleading, but make no guarantee as to the accuracy or completeness of the information or opinions contained herein.

This document has not been approved for the purposes of Section 21(2) of the Financial Services & Markets Act 2000 of the United Kingdom (‘FSMA’). Any person who is not a relevant person under this section should not act or rely on this document or any of its contents. Research on its client companies produced and distributed by ED is normally commissioned and paid for by those companies themselves (‘issuer financed research’) and as such is not deemed to be independent, as defined by the FCA, but is ‘objective’ in that the authors are stating their own opinions. This document is prepared for clients under UK law. In the UK, companies quoted on AIM are subject to lighter due diligence than shares quoted on the main market and are therefore more likely to carry a higher degree of risk than main market companies.

This report is being provided to relevant persons by ED to provide background information about Watkin Jones plc. This document does not constitute, nor form part of, and should not be construed as, any offer for sale or purchase of (or solicitation of, or invitation to make any offer to buy or sell) any Securities (which may rise and fall in value). Nor shall it, or any part of it, form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Self-certification by investors can be completed free of charge at www.fisma.org

ED may in the future provide, or may have in the past provided, investment banking services to the Company. ED, its Directors or persons connected may have in the future, or have had in the past, a material investment in the Company.

More information is available on our website

www.equitydevelopment.co.uk

Equity Development, 15 Eldon Street, London, EC2M 7LD. Contact: [email protected] 0207 065 2690