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Taylor Wimpey - trading update

Charlie Huggins | 16 November 2015 | A A A
Taylor Wimpey - trading update

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Taylor Wimpey plc Ordinary 1p Shares

Sell: 154.00 | Buy: 154.10 | Change -8.80 (-5.40%)
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The UK housing market has continued to be very positive, with high levels of customer confidence and demand converting into increased sales and healthy sales price growth. Sales rates for the second half to date are c.22% ahead. Taylor Wimpey say that they now expect full year profit margins to improve by over 200 basis points and to achieve a return on net operating assets of over 25%. The shares rose by around 1% in early morning trading.

The group are fully sold for their targeted 2015 completions and c.27% forward sold for their expected 2016 private completions. The current total order book stands at a record £2.1 billion, excluding joint ventures (9 November 2014: £1.7bn).

Build costs have increased by c.5% during 2015, mainly due to higher labour costs, but this has been offset by sales price growth. The forward pressure on build costs has stabilised and the group expects to see a slightly reduced level of build cost increase during 2016 to that experienced in 2015.

The land market remains stable, with investment operating margins averaging c.20% and remaining above historical highs.

Taylor Wimpey maintains a strong financial position and expects net cash at the end of 2015 to be around £220 million (31 December 2014: £112.8m).

Pete Redfern, Chief Executive, commented:

"We have seen an excellent summer selling season strengthen further in the autumn period, with customer confidence high and demand underpinned by rising real wages and good access to a wide range of mortgage products... ...As we look forward, we are particularly pleased to see that the tighter lending requirements are helping to ensure that monthly payments remain affordable and sustainable, which contributes towards a healthy outlook for both homebuyers and homebuilders."

Our view:

Taylor Wimpey is enjoying strong volumes and rising selling prices, whilst the forward order book provides good visibility. The business is in excellent shape, and plans to pay a £300m special dividend to shareholders next year. Including regular dividends, this should see the group return more than £350m in 2016, equating to a dividend yield of over 6%. Further special dividends are a strong possibility, whilst market conditions remain favourable.

Since the general election, Taylor Wimpey has seen a significant improvement in the housing market. This momentum has continued into the summer and autumn. Unemployment is falling, and incomes are outpacing inflation, supporting demand for housing. Government schemes such as Help-to-Buy are helping more people to get onto the housing ladder. More importantly, record low interest rates have significantly reduced mortgage costs. So even though house prices have risen, mortgages remain affordable for many.

Unfortunately, it has not escaped investors' attention that the house builders are in a sweet spot, meaning the sector is trading at a significant premium to book value. This means share prices are likely to be vulnerable when the next housing downturn arrives. For now, market conditions remain favourable, suggesting the house builders' purple patch could last a while longer.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.