In October, Watkin Jones welcomed a new chief financial officer following the retirement of Phil Byrom, who held the role for two decades. Stepping into his shoes, Sarah Sergeant has joined the AIM-listed housebuilder as it gears up for growth in build-to-rent.
Sergeant joined from FTSE 100 foodservice group Compass, having scaled the ranks over 14 years to a divisional CFO position. Last year, Compass clocked £18bn in revenue, against Watkin Jones’ forecasted year-end figure of £430m.
“Ultimately, I was looking for a CFO number one listed role. That was always my ambition,” Sergeant says. What attracted her to Watkin Jones was the market opportunity in the rental model. She draws a comparison between the two services businesses, both with a capital-light model targeting high levels of growth: “That B2B2C element is very similar. You’ve really got to find the balance between doing the right thing from a client perspective and having the right offer and product that the end consumer wants.”
Compass’s low margins commanded a lean, flat structure and a hands-on approach. This made the leap to Watkin Jones a “natural step”, says Sergeant, although she is enjoying a healthier margin, reported at 14.6% for 2020, against Compass’s 4.5% in 2021. Now she must defend that bottom line against various conflicting demands, including build cost inflation that has caused many to down tools, ESG needs and future-proofing investments.
Under the skin
A month into the role, Sergeant has already donned her hard hat touring Watkin Jones’ construction sites and hosted investors at a capital markets day in November. In this way, she looks to “get under the skin of the business”, preparing for the company’s annual results in January.
Courting investors last month, she found they wanted to know about build cost inflation, suppliers and labour. As the company’s work progresses on sites across the country – in Leicester, Brighton, Lewisham, Exeter and elsewhere – with funders and suppliers locked down, it is protected against rising costs. “When we forward-sell to an investor, we would also do a back-to-back sub-contractor package at the same time, so you have a fixed cost basis for the course of that development,” says Sergeant. This includes pricing in inflation, estimated at 3-4%.
Earlier this year, the National Federation of Builders said a shortage of construction materials was holding up development. In Knight Frank’s third-quarter housebuilder survey, 61% identified supply chain issues and materials shortages as the largest challenge to their bottom line. Although more than half of housebuilders said house price inflation has allowed them to manage this rising cost, most have still taken a profit hit.
“We do operate in a slightly different sector from the mainstream housebuilders, in terms of the size and structure of the development,” says Sergeant. In September, Watkin Jones’ secured development pipeline was £1.7bn, covering 3,870 BTR flats and 6,750 student beds. Over the past year, the developer has shifted its business to capitalise on investor demand for rental assets, with a new affordable housing business and larger mixed-use regenerations.
Those deal structures and the scale of projects help to offset costs without reliance on the consumer sales market. “We have a dense network of really good relationships with suppliers and contractors, and that is where you are able to explain and sell the story of the opportunities that will come within those developments,” says Sergeant. “You make yourself much more attractive as a client.”
Future-proofing development
The company’s cash position of £125m at the year end means that those developments will continue to grow. With development and revenue projections for the next couple of years locked down, Sergeant will be focused on delivery for 2024 and onwards.
“The final piece is the affordable homes strategy,” she adds. With a pilot site in Crewe, the company will seek to replicate its private rental strategy with social housing. “We are very much seeing the same institutional investors wanting to come into these sectors. It’s really about how we can build out those aspirations and targets.”
That strategy will also support an ESG focus. Last month, Watkin Jones unveiled new ESG targets, taking a harder line on suppliers and staff. That includes cutting its own emissions to net zero by 2030 and demands for a “meaningful reaction” to Scope 3 emissions further down its supply chain. Sergeant says building green is likely to drive a 1-2% rise in costs, but adds: “We really do expect that value to be regained, and more, by the incremental value that we will see coming through in the assets.” Sergeant says that this increase will apply to consumers as well as investors.
“We know what we are going to do and we know we want to do it, but it’s making sure we are evolving as the industry evolves,” she says. The developer has a target on heat pumps, but also an ear to the ground and will be ready to change if hydrogen boilers become a priority. For a CFO in times of crisis, Sergeant notes that although a steely eye on the balance sheet and cash flow is essential, there is huge value in identifying new opportunities.
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