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Taylor Wimpey - a strong half, but caution kicking in

George Salmon | 13 November 2018 | A A A
Taylor Wimpey - a strong half, but caution kicking in

No recommendation

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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Taylor Wimpey has released a brief update confirming it's on track to meet expectations for the full year.

However, the group also confirmed delays have impacted outlet openings, meaning it is operating from 261 outlets at present, slightly lower than expected.

The shares fell 1.4% on the news.

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Our view

There are cracks starting to appear in the UK housing market. Transaction numbers are down, which is hurting estate agents and even causing prices to start falling in a few areas.

However, the housebuilders are still churning out growth. This situation may seem contradictory, but we think government policy is where the builders are getting that bit of extra support.

Around 40% of Taylor Wimpey's sales are to first time buyers, who are eligible for financial assistance through stamp duty relief and the Help to Buy schemes.

In addition, many of the factors driving the UK housing market in recent years remain in play. Brits are ideologically committed to home ownership and the country still faces a major housing shortage. The Bank of England's recent decision to raise rates will increase the price of mortgages, but rates are still incredibly low by historical standards.

Our worry is that it's hard to see things getting much better, and housing is notoriously vulnerable to rapid changes in sentiment. It'd be foolish to think the market won't come off the boil at some point. A Brexit- induced economic slowdown, the withdrawal of supportive government schemes and a rapid increase in interest rates are all possible catalysts.

Encouragingly, Taylor Wimpey is in a better position than in the past. The group has displayed good financial discipline and has a much stronger balance sheet than before the last crisis.

The shares offer an attractive prospective yield of 11%. However, investors should be aware this is largely dependent on special dividends. At present, there's little reason to suspect a diversion from plans to increase the payout in the near-term, but if prices start falling and conditions materially worsen, future payments could well be lower.

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Trading details

Sales rates in the second half have remained strong at 0.77 sales per outlet per week (2017 equivalent period: 0.71). Underlying prices remain consistent with the prior year.

The total order book, excluding joint ventures, represents 9,783 homes, worth around £2.4bn. While this is 12% more homes than last year, the group expects this to wind down by the year end, as transactions complete.

The commitment to increase the total dividend by 20% in 2019 has been reiterated, although management remains mindful of wider political and economic risks. The group has already seen some signs of customer caution, particularly in the South East. With that in mind, it has increased the investment margins at which it will acquire land.

The short term landbank is broadly flat at c.75k plots, with the strategic land pipeline increasing to over 120k potential plots as at the end of October 2018. Taylor Wimpey remains focused on adding larger sites, particularly from its strategic land pipeline.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.