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Taylor Wimpey - Trading strong

George Salmon | 27 April 2017 | A A A
Taylor Wimpey - Trading strong

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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: 162.75 | Buy: 162.85 | Change 1.20 (0.74%)
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A brief trading update from Taylor Wimpey prior to its AGM confirms a 'good start to 2017, with positive customer demand and good mortgage availability supporting a strong sales rate.'

However, after concluding a review of historic leasing structures, a gross provision of c.£130 million will be made in first half accounts. The group has previously sold homes with a lease structure requiring the ground rent doubles every 10 years until the 50th year. The shares dipped 1.2% on the news.

Our View

Fears that the vote to leave would blow a Brexit-shaped hole in the housing market have unravelled, as the big players consistently report demand holding up well. This has helped to send Taylor Wimpey shares up, and back to pre-referendum levels.

However, it hasn't been plain sailing for everyone in the property game. For example, some of the UK's estate agents have made notably less encouraging noises. The extra wind in the sails of the builders may be coming from the Help to Buy schemes, which are specifically designed to promote the purchase of new build homes. Indeed, data from Rightmove shows that house price growth has been much stronger at the bottom than the top of the price range.

Many of the factors that have been driving the UK housing market in recent years are still in play. Brits remain committed to home ownership and the UK still faces a major housing shortage, supporting demand in the long run. Perhaps most importantly, mortgages remain affordable thanks to interest rates that look set to stay lower for longer.

While much of the initial furore around the EU vote has died down, housing is a notoriously cyclical sector and conditions will not stay so rosy forever. Sentiment can change quickly. Whether it comes as a result of the economy creaking, or interest rates rising, investors should be prepared for the downs as well as the ups.

Nonetheless, 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 last crisis. A £130m impairment, in relation to lease agreements on properties sold between 2007 and 2011 that saw ground rents double every 10 years, is not ideal, but should be absorbed easily enough.

Indeed, the group was clear that the impairment doesn't impact its capital return plans. However if prices start falling and conditions do materially worsen, the dividend could yet come under question. The prospective yield is currently 6.7%.

Current trading:

At the full year stage in February, the group reported revenue of £3.7bn, up 17.1% on 2015. This was 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 came in 20% higher at £764.3m.

A brief trading update on 27 April confirmed that year to date, average private net reservation rates are 16% ahead of last year, at 0.93 sales per outlet per week (2016 equivalent period: 0.80). Cancellation rates remained low at 10% (2016: 11%). The strategic land bank (land without planning permission) currently stands at 108,000 plots, with the short term landbank at 75,000 plots (around 5.5 years of supply at current rates).

Taylor Wimpey continues to aim to paying 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 will pay a final dividend of 2.29p per share on 19 May. Add in another 9.2p special dividend, due in July, and the total payment for 2017 will be 13.8p.

The group is encouraged by the early signs of stability and resilience of the market following the EU Referendum, and says that the market in central London has stabilised. 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.