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Taylor Wimpey - A confident outlook

George Salmon | 28 February 2017 | A A A
Taylor Wimpey - A confident outlook

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Taylor Wimpey plc Ordinary 1p Shares

Sell: 125.30 | Buy: 125.45 | Change -1.50 (-1.18%)
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At full year results, Taylor Wimpey reported a strong increase in profits, and confirmed its continued confidence in the near term outlook. The group is encouraged by robust trading and levels of demand says it has made a good start to 2017. The shares were broadly flat in early trading.

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, data from Rightmove shows that nationwide asking prices in January 2017 are 2.5% down from July 2016 levels.

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. Perhaps most importantly, 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 7.8%. 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 results:

Group revenue of £3.7bn is 17.1% up on 2015, driven by a 10.9% increase in average selling prices to £255,000, and a 4.8% increase in completions to 14,112. Despite higher land and build costs, which reflect a higher proportion of sales in London and the South East and an increased cost of labour, operating margins rose from 20.3% to 20.8%. Group operating profit is 20% higher at £764.3m.

The group continues to operate on a replacement basis, acquiring 6,355 plots over the year and converting 9,519 from its strategic land bank. The strategic land bank (land without planning permission) currently stands at 108,000 plots, with the short term landbank at 76,000 plots (around 5.5 years of supply at current rates).

Taylor Wimpey continues to aim to pay an ordinary dividend through the cycle, and enhance this with special dividends when appropriate. After paying out 10.91p per share in 2016, (including a 9.2p special dividend) the group says the 2017 payment, planned to be 13.8p (including a 9.2p special dividend) will be made in July 2017.

The group is encouraged by the early signs of stability and resilience of the market following the EU Referendum, and believes the risk of a material impact in the short term has significantly reduced. While it will continue to closely monitor market risks, particularly around long term mortgage cost, it believes the period of stability we are seeing in the UK housing market can continue.

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.