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Taylor Wimpey - Continued progress against an uncertain backdrop

George Salmon | 11 January 2017 | A A A
Taylor Wimpey - Continued progress against an uncertain backdrop

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Taylor Wimpey plc Ordinary 1p Shares

Sell: 154.00 | Buy: 154.10 | Change -8.80 (-5.40%)
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Continued progress against an uncertain backdrop

A trading update prior to full year results scheduled for 28 February shows 'good progress in 2016, with an increase in housing completions and robust trading despite wider macroeconomic uncertainty.' The group expects profits to come in at the top end of market expectations. The news saw the shares open up 1.7%.

Our View

While the builders have been reassuring investors that demand is holding up post-referendum, not all the data has been so positive. For example, Rightmove released data suggesting that the average asking prices fell 1.1% for properties put on the market in November 2016.

That kind of conflicting information has defined the housing market since the vote to leave. Housebuilders seem to be prospering even as the wider housing market struggles. Some of the extra wind in the sails may be coming from the Help to Buy schemes, which are specifically designed to promote the purchase of new homes.

However, many of the factors that have been driving the UK housing market in recent years are still there. Brits remain committed to home ownership and the UK still faces a major housing shortage, which should support demand in the long run. Mortgage affordability is supported by interest rates that look set to stay lower for longer.

Should a sustained downturn materialise, Taylor Wimpey is in a better position than it has been in the past. The group has displayed good capital discipline and has a much stronger balance sheet than before the 2008 crisis.

Meanwhile, the group's capital return plans make the potential dividends attractive, with a prospective yield of 7.9%. However, investors should be mindful that this is close to the 8% mark that often suggests investors are worried the dividend might not be sustainable. If prices start falling and conditions do materially worsen, it could be more widely questioned.

The group currently trades on a forward price to book ratio of 1.9x, significantly above its historic average.

Full year trading in detail:

In 2016 total home completions increased 4% to 13,881, including joint ventures. Operating profit margins are expected to increase from 20.3% to 20.8%.

Average selling prices increased 11% to £255,000, due to the impact of more homes being sold in premium locations, including a spike in Central London completions in December. Looking forward, the average selling price of 7,567 homes in the year end order book is lower than at this time last year. This reflects the completion of more higher-priced homes in 2016.

The pace of sales remained consistent, with the net private reservation rate stable at 0.72 homes per outlet per week.

Land purchases were broadly in line with the replacement rate, meaning the group's short term landbank remains around 76,000 plots. In light of the ongoing uncertainty around the UK economy, the group will continue to be selective in further land investment.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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.