SIF Folio: Watkin Jones - A Top Quality AIM Stock?

25th Jan '22 by Roland Head

13 comments 3275 reads

The new year has got off to a somewhat shaky start in the markets, and I fear there could be worse to come. Fortunately, my rules-based SIF portfolio is well-provided with cash to pick up any potential bargains.

I’m also pleased to report that my buying screen is starting to offer a greater number of new stocks to consider for SIF. I hope that over the coming months, I’ll be able to replace some of the shares I sold during the final few months of 2021.

The company I’m looking at this week is currently the top-ranked stock in my screening results. It’s also a business I’d describe as one of the better quality stocks on the AIM market. Watkin Jones (LON:WJG) is a property developer with family ownership that’s delivered a total shareholder return of 195% since its 2016 IPO.

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The publication of Watkin Jones’ FY21 results last week appears to have improved the stock’s financial metrics, triggering their appearance in my screening results. Although I’m wary about housebuilders at the moment, this is a somewhat different business. Watkin Jones operates a capital light model, developing and managing purpose-built student accommodation and new-build apartment blocks that are sold to institutional rental landlords.

Managing many of these rental properties through its Fresh business provides a resilient income stream for the group. Meanwhile, most of the firm’s new developments are forward sold to institutional investors. This locks in returns, reducing Watkin Jones’ exposure to near-term market risk, Of course the market risk remains – forward demand or pricing could weaken, limiting the group’s ability to replenish its pipeline of new projects. However, demand is strong at the moment and forward-selling de-risks current developments, providing a margin of safety.

One potential concern for me is that this business might become less differentiated as the involvement of the Watkin Jones family wanes. Family ownership has fallen from around 35% at the time of flotation to just 6.5% today, while family CEO Mark Watkin Jones stepped down in January 2019. Longtime CFO Phil Byrom left the business late in 2021.

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Of course, it’s not unusual for founders to sell down their holdings and step down in the years following a listing. It’s often one of the goals…

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Doug2b

25th Jan '22

Average annual net tangible equity growth in recent years is c2.5%. Add that to the divi of around 3.8%, gives a total of c6.3% tangible surplus relative to MCap. Somewhere between a moderate bargain and a fair price.

Are you going to lose your shirt with Watkin Jones? No, not likely. Should you expect to out perform the overall market over time with Watkin Jones? Yes, probably, to some extent. There are stronger buys out there in my view, but this looks okay, maybe just 25% too high in terms of share price for me to potentially be interested.

Lucky dip

The housebuilders are good value to me now. High dividend, plenty of cash and their product is in demand permanently!

are we at the peak of the cycle? with interest rate on the rise and cost inflation eating into the profit?

no sign of that yet.

for conservative investor Henry Boot is a good choice.

I go for persimmon and Bellway.

Bellway, Redrow and Berkeley are the best house builders. Persimmon has a dangerously thin land bank, they claim it is intentional, it is not, it is part of the Jeff Fairburn legacy, avoid Persimmon.

We need to build a lot of houses going forward over the next decade and the three mentioned above have always been sitting on cash at very crisis and every downturn, which they use to buy up land aggressively, when others are not buying. But, UK stocks, the under priced UK facing businesses that is, are well overdue a bounce to take them back above their pre-covid highs. The problem with house builders is, the negative noise surrounding them at the moment, could hold them back. The cladding costs are not a threat in any way to BWY, RDW and BKG, but the negative noise around the sector could be a factor over the coming months.

Consequently, I have gone lighter on BWY and have increased ScS and Fort - Fort (bricks) is about to commission Europe's largest brick plant. Boot is also compelling as you say and I have not lightened Boot. I will increase my housebuilder again holdings in time.

Norfolk'n'Good

Hi Roland

First Drax and now WJG - my portfolio is starting to look like your SIF - no bad thing in my opinion!

Watkin Jones (LON:WJG) appeals to me as the business model eliminates a lot of the obvious risk that building firms usually have to contend with;

Capital light model - lots of building projects pre sold, trusted by institutional investors - barrier to entry, strong demand for student accommodation and build to let housing - so huge and growing order pipeline, excellent track record - projects are managed and delivered on time cementing (couldn't resist it) existing relationships.

I agree a tad overpriced but who was it said 'I'd rather pay a fair price for an excellent business......?

whatmore1951

26th Jan '22

You seem to have gone cooler on Bellway (LON:BWY) which I think was your top pick.

27th Jan '22

Bellway was one of my largest holdings. I have now lightened on BWY, moving more money into Fort and ScS last week.

In time I will return to BWY, but there is so much negative noise around the house builders due to the cladding dispute and rising interest rates etc.

I do not see either of these factors as a threat to my preferred house builders, but I am expecting a decent price recovery for under priced UK facing stocks at some point and I fear that house builders might miss out on some of the recovery in the shorter term.

Pentago

Watkin Jones (LON:WJG) has been in a sweet spot and something of a brokers' favourite, however stepping into the stock here is likely to be a case of bad timing. Specialising in new built student accommodation, that market looks less promising going forward - with so much central office space ripe for conversion. The move into private and part-owned accommodation (largely flats) is also likely to find similar headwinds. My daughter attempted to buy a Watkin Jones flat in Stratford and the customer experience was extremely poor, unable to confirm the cladding, no property management process etc - she had to withdraw. Given recent relative out-performance and general move from flats to houses, I think this is one builder I would stay clear of here, especially as the valuation is not compelling on a relative basis.

cmpeckham

28th Jan '22

Slightly off topic, but I wonder if anyone with insight to the industry would comment on Inland Homes (LON:INL) . It seems to offer a promising combination of low price to tangible assets combined with a history of high ROCE and a capital light model that sets it slightly apart in a good way. Any insights?

JohnEustace

I'm a previous Watkin Jones (LON:WJG) holder so still keep an eye on them. I'm of the opinion that what matters in the build to rent market is how well it works out for their institutional customers which I'm unable to gauge.

I occasionally drive past the WJG development by Reading station and see they still have units to rent. There's a lot of flats development in that area and the WJG build seem to be at the high end in price and quality. Whenever I wonder where all the renters are going to come from, multiple people say they have relatives who had to move away because they couldn't find anything, but still I wonder.

Anyway, these are the flats:

https://thamesquarter.co.uk/

https://www.rightmove.co.uk/pr...

I'm puzzled that your daughter was buying a WJG flat because I thought they were all built to rent?

Rusty2

I think it fairly common in many towns/cities in SE England that there is a glut of flats, too many for the market, not everyone wants or needs a flat, yet they built heaps of them, maybe it is to meet planning targets, I don't know. But it was a common complaint, I heard from people in the housing market, when I lived near a city.

Bronstein

1st Feb '22

Bogdan? Pleased to see you have signed-up here.

17th Feb '22

I see from a report in the FT that L&G are committing a further £2.5bn to homes for rent schemes over the next five years.. There are other institutions joining in as well - Lloyds Bank, Macquarie, and Goldman Sachs.

https://www.ft.com/content/91f...

SIF Folio: Watkin Jones - a top quality AIM stock?

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Roland Head

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