Structural Undersupply In Rental Housing Will Support Long Term Earnings Recovery

Catalysts

About Watkin Jones

Watkin Jones is a vertically integrated developer and operator focused on U.K. residential for rent, including purpose built student accommodation and build to rent assets.

What are the underlying business or industry changes driving this perspective?

• Structural undersupply in student and rental housing, combined with tightening student to bed ratios and persistent rental demand, may support stronger pricing for new schemes and asset sales, which in turn could lift development revenues and support earnings.
• The growing preference of institutional capital for high quality, ESG compliant, operational and development assets may channel more funding towards Watkin Jones pipelines in PBSA and build to rent, potentially improving deal volumes and fee based income.
• The shift towards value add and repositioning strategies for older stock could benefit the Refresh and refurbishment offering, where traction on higher margin projects may support group gross margins and cash generation.
• Execution of the diversification strategy towards a higher mix of development partnerships and granular Refresh revenues may help smooth cyclicality and underpin more stable revenues and net profit over the cycle.
• Scaling of the Fresh management platform, with changes in units under management and occupancy, may build recurring, capital light income that can support operating leverage and contribute to more predictable earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Watkin Jones's revenue will grow by 21.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.0% today to 5.1% in 3 years time.
• Analysts expect earnings to reach £25.4 million (and earnings per share of £0.08) by about December 2028, up from £-8.4 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 9.6x on those 2028 earnings, up from -8.2x today. This future PE is lower than the current PE for the GB Real Estate industry at 14.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.41%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent weakness in transaction market liquidity and slower than expected rate cuts could continue to delay forward funding and asset sales, limiting the conversion of the GBP 2 billion pipeline into completed deals and constraining revenue and earnings growth over the medium term.
• Ongoing and potentially tightening building safety regulation, together with further remediation findings beyond the existing GBP 46 million provision, could drive additional one off costs and project delays, eroding gross margins and depressing statutory profitability.
• Continued land market intransigence, with reluctant sellers and low transaction volumes despite lower land values, could restrict Watkin Jones ability to secure attractive new sites at scale, slowing long term pipeline renewal and ultimately impacting future revenue and operating profit beyond 2027.
• If institutional capital remains concentrated on stabilized operational assets rather than development risk for longer than anticipated, development partnerships and JV structures may scale more slowly, limiting the diversification strategy and capping growth in higher margin fee based income and net margins.
• A sustained downturn or policy shock affecting international student demand or rental affordability could weaken occupancy and rental growth in PBSA and build to rent, undermining the investment case for new schemes and reducing forward sold volumes, which would weigh on both top line revenue and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of £0.7 for Watkin Jones based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £1.03, and the most bearish reporting a price target of just £0.38.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be £500.3 million, earnings will come to £25.4 million, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 10.4%.
  
• Given the current share price of £0.28, the analyst price target of £0.7 is 60.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.