Interesting write-up - hadn't heard of this name before. Almost unbelievably cheap, looking at what they used to earn.
A couple notes/questions:
1. The £46m cladding liability has already been expensed. If they've added a liability onto the balance sheet (without adding a corresponding asset), that IS them recognising the cost. As they actually pay it, the liability will be written down, at the same time as cash/inventory is spent doing the re-cladding. Because they're writing down an asset and a liability at the same time, no cost need be reported (remember earnings (less payouts to shareholders) equals change in equity, equals change in assets minus change in liabilities) - although it's at that time that you'll see it run through the cash flow statement. Let me know if you need any more explanation on this.
2. You marked the goodwill of the fresh business acquired down slightly, but kept it at £8m because the business could easily be sold for £8m - but I think what you've forgotten is the assets of that business are now consolidated onto WJ's balance sheet, so if you assume a sale of the fresh business, you're double counting if you don't subtract its assets from the balance sheet (assuming it has net assets associated with it). Generally when we're doing liquidation valuations we would liquidate all parts of the business, rather than sorta a mix of liquidation and SOTP like this - but to be fair it's your life. Just make sure you're able to sub out the fresh business's net assets in that case.
3. In a liquidation analysis we also tend to mark down non-cash assets to be conservative. Common numbers are 80% for receivables, 50% for PPE, somewhere in-between for inventory - and we would usually wipe off tax assets entirely. That's to account for the fire-sale prices that we would expect to see in a liquidation. You can be a bit more sophisticated with some of those if you like, and try to estimate how much they'd actually go for - but they're intended to show the business is undervalued under a worst-case scenario - so for that reason you might as well be conservative if you do do one. Then again, I think if you don't expect the business to be liquidated, why do a liquidation analysis?
4. The market valuation here is... weird. If I took a glance at those financials and tried to pluck an estimate out of thin air for the value I would probably say something on the order of £300m. So you have to ask yourself what the market is thinking here. There's quite definitely not any risk of bankruptcy looking at the current balance sheet (as long as management don't find some magical way to cock it all up). So the market must be looking at the last 2 years of operating earnings - which have been about zilch - and thinking that's gonna continue for the foreseeable. The question then is, why won't it? What changed in 2023/24 versus prior years, and why will the future look like prior years, not the recent past?
5. A last note - I found the financials being given on a half-yearly basis quite confusing, as an investor I'm very used to everything being presented on a 12-mo basis unless clearly specified - especially since housebuilding is a fairly seasonal business. I'd suggest trying to stick more to annual financials in the future :)
Given the insane valuation, I'm gonna start looking into this one immediately. I'll let you know my thoughts when I have some. Thanks for shining the spotlight on this!
Point 2 I gave a worst case (firesale) and probable case range of outcomes.
Point 3 a liquidation analysis because the market cap is at or below that level. When you consider the news flow clearly there is no such danger - at least that I can detect.
Point 4 - as I set out in my article the underlying earnings are strong, and appear to be growing stronger based on news flow. Once you take away exceptions these will accelerate statutory earnings. There is a lot of fear and uncertainty over further legislative compliance and the cost of that.
Point 5 - 6 monthlies are usual for UK stocks - interims and finals - US seem to like quarterly so I don't know where you herald from but only once a year sounds very exotic!
Happy to hear your further thoughts, in due course.
I think you missed the point on point 2. You're double counting. That's not a matter of optimistic or not, it's just an arithmetic error.
Regarding the news flow, I think you might be misinterpreting things. Much of the news has been about development progress on existing deals, rather than signing of new deals. In the whole of 2024, they have signed 3 deals - Stratford (£120m, but WJ's equity stake is only 25%), Bristol PBSA (260 beds), and St Helens BtR (295 beds). Compared to historical levels of dealmaking, that is quite poor - the total value is probably c. £250m, whereas they need £430m of deals per year to sustain current revenue levels. The effect of that lack of dealmaking now will be felt in the results of FY25 and FY26. That, I believe, is the reason this stock is so cheap - the market isn't willing to wait 2+ years for a recovery. It's not really about the exceptionals - the market is looking at underlying earnings already.
On point 5, I didn't mean the company publishing results half-yearly, I meant you presenting the financials by half-year. Just think it can be a little confusing for a seasonal business. I am also UK.
no actually you appear to have missed the point and no I've not double counted it that I can see, therefore there is no arithmetic error. I've listed the intangible in column 2 (replicating the balance sheet as at 31/03/24) to show what is in the books. That it not an outcome or scenario.
There are two scenarios. I then include it at zero in the "Worst Case" scenario (column 4) and then at a reduced rate in the "Probably" scenario (column 5). Those are two different outcomes. I am NOT suggesting both outcomes will occur, nor that the historic balance sheet is in addition to the outcome. You don't get to sell something plus claim you own it still.....but I would think that was obvious?
2/
Regarding the 2H2024 newsflow I think you might be misinterpreting things, and might have misunderstood the newsflow.
I make clear which are existing deals (denoted in the Finish column) and those which begin (denoted Start). In any case you have access to the same information as I have and could analyse them yourself - as I have.
The rows marked "start" sum to £698m in my estimatation, and that's based on the WJG web site news flow for 6 months since July 2024. I make clear my estimate per bed and per property and those numbers are in keeping with other projects - of £100k-£200k per unit depending on type and size.
If somehow I'm overestimating the values and your estimate £250m is correct (implying that units are being built and sold for about £60k per unit.... REALLY? I struggle to think that is a realistic number in 2024+?) then £250m of newsflow for 6 months sums to £500m annualised which according to your own view of the sustainable level of deal flow is about £70m per year above a sustainable level.
I don't agree with your view therefore about the market being unwilling to wait 2+ years for a recovery.
In any case the full year earnings release is January 21st 2025 so we will have a better picture then.
1. No, you're still missing my point. I wasn't suggesting you were adding the "probably" and "worst case" scenarios. I'm saying you're counting the value of fresh twice - once when you assume it's sold for £8m, and once when you assume its assets are sold, by not removing Fresh-related assets when you liquidate the rest of the balance sheet. Maybe the fresh-related assets are very small, in which case it doesn't matter much. And obviously, in the worst-case scenario you mark Fresh at £0, so all is well there.
2. There are several milestones for each project at which they will publish it on "News & Insights". When planning consent is given, when they forward fund it, when they top out (finish pouring concrete, essentially), and when they practically complete it. Signing a deal (unless it's a partnerships deal) means forward funding it. However you were also counting announcements of planning approval and announcements of topping out as being deal signed. This is not the case.
An example makes this clear. They announced topping out on Tai Afon in July 2024, and it made it into your list. However, this deal was funded all the way back in September 2022.
I think you said in the post that they don't RNS it when they win deals. This isn't true. They just don't give all the other milestone announcements. This makes it easier to see how many deals they actually signed in 2024 - it was 3. 397 beds in stratford, 260 in bristol, 295 in st helens. St helens is worth £48m, Stratford £96m, and Bristol they didn't announce, but probably c. £60m. So total is about £200m actually. And that's not the last 6 months, that's the whole year. You have to be careful not to use half-yearly data, because as I said, it's seasonal - most of their sales come in H2 so if you just look at H2 you'll think they're doing better than they are.
So £200m of deals signed in a full year. That's pretty dire.
Still, I'm on your side here - I think it's criminally undervalued.
I am curious, if you don't think the market is willing to wait 2 years, what you think the reason for such a low price is?
1. I see what you're driving at. Fresh is an asset management business so won't itself have many assets - PCs, desks and software - probably. I wrote down right-of-use assets by £1.9m in the probably scenario (and 100% in the other) so let's say those business assets are contained in there and thus are not double counted.
2. Yes I see your point about the statuses. Thank you also for sending an attachment, unfortunately I can't access it. It would be useful to profile these further.
1. Good enough for me. To be fair, I had originally assumed property management meant they owned the properties too - didn't realise when I wrote my first comment that it was just an asset-light management business.
The point I'm trying to convey is the underlying performance excluding exceptions appears far stronger even though 2020 to 2024 have been a difficult trading period (high interest rates, supply chain disruption, uncertainty etc)
Interesting write-up - hadn't heard of this name before. Almost unbelievably cheap, looking at what they used to earn.
A couple notes/questions:
1. The £46m cladding liability has already been expensed. If they've added a liability onto the balance sheet (without adding a corresponding asset), that IS them recognising the cost. As they actually pay it, the liability will be written down, at the same time as cash/inventory is spent doing the re-cladding. Because they're writing down an asset and a liability at the same time, no cost need be reported (remember earnings (less payouts to shareholders) equals change in equity, equals change in assets minus change in liabilities) - although it's at that time that you'll see it run through the cash flow statement. Let me know if you need any more explanation on this.
2. You marked the goodwill of the fresh business acquired down slightly, but kept it at £8m because the business could easily be sold for £8m - but I think what you've forgotten is the assets of that business are now consolidated onto WJ's balance sheet, so if you assume a sale of the fresh business, you're double counting if you don't subtract its assets from the balance sheet (assuming it has net assets associated with it). Generally when we're doing liquidation valuations we would liquidate all parts of the business, rather than sorta a mix of liquidation and SOTP like this - but to be fair it's your life. Just make sure you're able to sub out the fresh business's net assets in that case.
3. In a liquidation analysis we also tend to mark down non-cash assets to be conservative. Common numbers are 80% for receivables, 50% for PPE, somewhere in-between for inventory - and we would usually wipe off tax assets entirely. That's to account for the fire-sale prices that we would expect to see in a liquidation. You can be a bit more sophisticated with some of those if you like, and try to estimate how much they'd actually go for - but they're intended to show the business is undervalued under a worst-case scenario - so for that reason you might as well be conservative if you do do one. Then again, I think if you don't expect the business to be liquidated, why do a liquidation analysis?
4. The market valuation here is... weird. If I took a glance at those financials and tried to pluck an estimate out of thin air for the value I would probably say something on the order of £300m. So you have to ask yourself what the market is thinking here. There's quite definitely not any risk of bankruptcy looking at the current balance sheet (as long as management don't find some magical way to cock it all up). So the market must be looking at the last 2 years of operating earnings - which have been about zilch - and thinking that's gonna continue for the foreseeable. The question then is, why won't it? What changed in 2023/24 versus prior years, and why will the future look like prior years, not the recent past?
5. A last note - I found the financials being given on a half-yearly basis quite confusing, as an investor I'm very used to everything being presented on a 12-mo basis unless clearly specified - especially since housebuilding is a fairly seasonal business. I'd suggest trying to stick more to annual financials in the future :)
Given the insane valuation, I'm gonna start looking into this one immediately. I'll let you know my thoughts when I have some. Thanks for shining the spotlight on this!
Hello Matt,
Point 1 is well made - you're right.
Point 2 I gave a worst case (firesale) and probable case range of outcomes.
Point 3 a liquidation analysis because the market cap is at or below that level. When you consider the news flow clearly there is no such danger - at least that I can detect.
Point 4 - as I set out in my article the underlying earnings are strong, and appear to be growing stronger based on news flow. Once you take away exceptions these will accelerate statutory earnings. There is a lot of fear and uncertainty over further legislative compliance and the cost of that.
Point 5 - 6 monthlies are usual for UK stocks - interims and finals - US seem to like quarterly so I don't know where you herald from but only once a year sounds very exotic!
Happy to hear your further thoughts, in due course.
OB
I think you missed the point on point 2. You're double counting. That's not a matter of optimistic or not, it's just an arithmetic error.
Regarding the news flow, I think you might be misinterpreting things. Much of the news has been about development progress on existing deals, rather than signing of new deals. In the whole of 2024, they have signed 3 deals - Stratford (£120m, but WJ's equity stake is only 25%), Bristol PBSA (260 beds), and St Helens BtR (295 beds). Compared to historical levels of dealmaking, that is quite poor - the total value is probably c. £250m, whereas they need £430m of deals per year to sustain current revenue levels. The effect of that lack of dealmaking now will be felt in the results of FY25 and FY26. That, I believe, is the reason this stock is so cheap - the market isn't willing to wait 2+ years for a recovery. It's not really about the exceptionals - the market is looking at underlying earnings already.
On point 5, I didn't mean the company publishing results half-yearly, I meant you presenting the financials by half-year. Just think it can be a little confusing for a seasonal business. I am also UK.
Matt,
1/
no actually you appear to have missed the point and no I've not double counted it that I can see, therefore there is no arithmetic error. I've listed the intangible in column 2 (replicating the balance sheet as at 31/03/24) to show what is in the books. That it not an outcome or scenario.
There are two scenarios. I then include it at zero in the "Worst Case" scenario (column 4) and then at a reduced rate in the "Probably" scenario (column 5). Those are two different outcomes. I am NOT suggesting both outcomes will occur, nor that the historic balance sheet is in addition to the outcome. You don't get to sell something plus claim you own it still.....but I would think that was obvious?
2/
Regarding the 2H2024 newsflow I think you might be misinterpreting things, and might have misunderstood the newsflow.
I make clear which are existing deals (denoted in the Finish column) and those which begin (denoted Start). In any case you have access to the same information as I have and could analyse them yourself - as I have.
The rows marked "start" sum to £698m in my estimatation, and that's based on the WJG web site news flow for 6 months since July 2024. I make clear my estimate per bed and per property and those numbers are in keeping with other projects - of £100k-£200k per unit depending on type and size.
If somehow I'm overestimating the values and your estimate £250m is correct (implying that units are being built and sold for about £60k per unit.... REALLY? I struggle to think that is a realistic number in 2024+?) then £250m of newsflow for 6 months sums to £500m annualised which according to your own view of the sustainable level of deal flow is about £70m per year above a sustainable level.
I don't agree with your view therefore about the market being unwilling to wait 2+ years for a recovery.
In any case the full year earnings release is January 21st 2025 so we will have a better picture then.
OB
1. No, you're still missing my point. I wasn't suggesting you were adding the "probably" and "worst case" scenarios. I'm saying you're counting the value of fresh twice - once when you assume it's sold for £8m, and once when you assume its assets are sold, by not removing Fresh-related assets when you liquidate the rest of the balance sheet. Maybe the fresh-related assets are very small, in which case it doesn't matter much. And obviously, in the worst-case scenario you mark Fresh at £0, so all is well there.
2. There are several milestones for each project at which they will publish it on "News & Insights". When planning consent is given, when they forward fund it, when they top out (finish pouring concrete, essentially), and when they practically complete it. Signing a deal (unless it's a partnerships deal) means forward funding it. However you were also counting announcements of planning approval and announcements of topping out as being deal signed. This is not the case.
An example makes this clear. They announced topping out on Tai Afon in July 2024, and it made it into your list. However, this deal was funded all the way back in September 2022.
I think you said in the post that they don't RNS it when they win deals. This isn't true. They just don't give all the other milestone announcements. This makes it easier to see how many deals they actually signed in 2024 - it was 3. 397 beds in stratford, 260 in bristol, 295 in st helens. St helens is worth £48m, Stratford £96m, and Bristol they didn't announce, but probably c. £60m. So total is about £200m actually. And that's not the last 6 months, that's the whole year. You have to be careful not to use half-yearly data, because as I said, it's seasonal - most of their sales come in H2 so if you just look at H2 you'll think they're doing better than they are.
So £200m of deals signed in a full year. That's pretty dire.
Still, I'm on your side here - I think it's criminally undervalued.
I am curious, if you don't think the market is willing to wait 2 years, what you think the reason for such a low price is?
Matt,
1. I see what you're driving at. Fresh is an asset management business so won't itself have many assets - PCs, desks and software - probably. I wrote down right-of-use assets by £1.9m in the probably scenario (and 100% in the other) so let's say those business assets are contained in there and thus are not double counted.
2. Yes I see your point about the statuses. Thank you also for sending an attachment, unfortunately I can't access it. It would be useful to profile these further.
OB
1. Good enough for me. To be fair, I had originally assumed property management meant they owned the properties too - didn't realise when I wrote my first comment that it was just an asset-light management business.
2. Okay let me have another go at that.
"This is a £22m profit and at a -£14.4m Admin Cost delivers roughly £15.2m operating profit over a full year."
So I've read this sentence now five times and still I don't understand it.
Sounds like a typo - I'll take a look at it later and correct - thanks for letting me know!
OB
Hi Simon, I've revised the numbers in this section. I was understating the underlying profit actually.:
https://theoakbloke.substack.com/i/153354580/valuation-lets-assume-wjg-continues
The point I'm trying to convey is the underlying performance excluding exceptions appears far stronger even though 2020 to 2024 have been a difficult trading period (high interest rates, supply chain disruption, uncertainty etc)