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Taylor Wimpey - higher costs put pressure on margins

Nicholas Hyett | 25 April 2019 | A A A
Taylor Wimpey - higher costs put pressure on margins

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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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Taylor Wimpey is on track to meet overall full year targets, but results will be weighted towards the second half of the year.

Higher than expected build cost inflation means margins will be lower than previously guided, although this should be offset by a stronger sales performance.

The shares fell 4.5% following the announcement.

The group intends to pay a total dividend for 2018 of 6.24p, an increase of 32%.

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Our view

The UK housing market is creaking. Transaction numbers are down, and prices are stagnating. More recently a combination of Brexit stockpiling and exchange rate headwinds have pushed up the cost of construction materials.

That's not great news for Taylor Wimpey.

The housing market in London and the South East has been particularly sluggish, and Taylor's particularly exposed to the area. So it could really do without that trend getting worse or spreading elsewhere in the country.

It doesn't help that other tailwinds are running out of puff. Help to Buy is set to end in 2023 and since 34% of Taylor Wimpey's sales are to first time buyers, well over 5,000 of its builds depend on the scheme each year. That will leave quite a hole to plug in a couple of years.

But for all the headwinds it's not game over. A lot 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. Interest rates are still incredibly low by historical standards, so mortgages remain cheap.

The added good news is that Taylor Wimpey's in a better condition than in the past. The group has displayed good financial discipline and has a much stronger balance sheet than before the financial crisis. That should help if conditions get tougher.

The final silver lining is near-term plans to increase the dividend remain unchanged, with £600m earmarked as shareholder returns this year. The prospective yield is 9.4% next year, although dividend growth is expected to be in short supply in the years ahead.

Investors shouldn't ignore the risks ahead though. If Brexit throws up any nasty surprises, conditions could change quickly.

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First Quarter Trading details

Average private sales rates per outlet per week were 1.03, which was ahead of expectations and represents an increase of 21% compared to last year. Underlying prices remain consistent with the end of last year.

The total order book represents 10,291 homes, worth approximately £2.4bn. The group continues to focus on developing larger sites.

The short term landbank stands at around 79,000 plots, and new outlet openings are slightly ahead of expectations. The group currently operates from 261 outlets.

As previously announced, Taylor will be paying a special cash dividend of £350m (10.7 pence per share) on 12 July 2019 - subject to shareholder approval at today's AGM. The dividend will be paid to those holding shares on 7 June 2019.

The group remains mindful of the political and economic environment, with CEO Pete Redfern saying: "in spite of wider macroeconomic uncertainty, the housing market has remained stable."

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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.