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Stephen Rawlinson
1 June 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 1st June 2017

Student accommodation developer and contractor Watkin Jones (WJ) reported its first half numbers to end March 2017 this morning. Capita is creeping slowly upwards and crept faster than anyone else yesterday, 2.8% to 583p. At the other end of the table Interserve crept down a further 2% to 224p and was the largest faller.

Student accommodation developer and contractor Watkin Jones (WJ) reported its first half numbers to end March 2017 this morning. The company specialises in multi-occupancy dwellings and has a position in the build to rent segment and a small operation in residential development. It has started tentative steps into the student letting and management area, acquiring Fresh Student Living Ltd in early 2016, just before the company floated on AiM in March 2016 at a price of 100p a share and closed last night at a record level of 187p.

The 8% fall in revenue in the period in question at WJ to £134m was distorted by one-off factors in the prior year, timing of sales and £11.7m gained from inventory sales helped generate £146m in the prior year first half. The earnings picture tells a better story with adjusted EBITDA up 27% to £22m and adjusted operating profit up 14% at £19.4m. Net cash fell 24% to £12m which should not be of great concern though the explanation of the fall being due to seasonal factors bears little scrutiny as the same factors were in place last year. Importantly the future pipeline has some credibility with 31 student developments in progress of which 20 are in the next two years and 15 of those are already forward sold. In our view the build to rent expansion might be more significant in the future and six schemes are currently in progress though they are not scheduled to complete until 2019 at the earliest. The net cash position and the pipeline suggest that activity levels will be sustained.

The operating margin at Watkin Jones of 15% begs the questions of why the larger companies in development and contracting are not doing more in multi occupancy, as margins are notably lower in general contracting and, of course, whether the company now being more evident, having floated, the margins might be competed away. On the former, competitor activity, WJ is more involved in the development phases of sites and land so in that sense its margins might be better compared with a housebuilder. On the issue of the levels being more vulnerable to now the competition is more aware of WJ’s work we can only say that it is a real risk. There are barriers to entry in what WJ does that will provide some insulation and the company is expanding into managing the properties it develops. There is no real short or mid-term threat to margins from competition, from what we can tell but longer term there will be.

Capita is creeping slowly upwards and crept faster than anyone else yesterday, 2.8% to 583p. The absence of a new permanent long term CEO is not helping the story as that appointment is crucial (look at rise in SIG since Meinie Oldersma was appointed CEO and showed his face to the City). Buying Capita now in the hope the right CEO is appointed makes little sense on its own, of course. Outgoing CEO Andy Parker is selling some of his shares at present, 55,686 were sold in early May at 571p a share. Having said that there are many good contracts at Capita and the work it does is essential to the operations of many of its customers. The market is warming increasingly to the view that with 60p of EPS this year, disposals nearing completion/balance sheet issues resolved and a 5.4% yield Capita may have a lot of attractions.

At the other end of the table Interserve crept down a further 2% to 224p and was the largest faller. It looks like it is heading back to the lows of the recession in 2011 when it closed at 158p in March 2009. There are some good operations in IRV, not least the Kwikform operation which it failed to sell last year. The potential liabilities on construction contracts might be very substantial and the incoming CEO, Debbie White who joins in September from FM Company Sodexo has here work cut out finding out where the real issues exist and how to solve them. No doubt much preparatory work is being done now but action cannot yet be taken and cash will be draining away, we expect as the position was flattered at end 2016. IRV, as with other restructure/special situations may have some value but it could still be too early to take the risk.

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