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Taylor Wimpey - higher costs put pressure on margins

Nicholas Hyett | 14 January 2020 | A A A
Taylor Wimpey - higher costs put pressure on margins

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Taylor Wimpey plc Ordinary 1p Shares

Sell: 223.10 | Buy: 223.40 | Change 4.10 (1.87%)
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Taylor Wimpey looks set to deliver full year results in line with expectations. In 2019 the group built 15,719 homes, representing around a 5% increase on 2018.

The group reconfirmed its intention to return around £610m to shareholders in 2020.

The shares were broadly flat following the announcement.

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Our view

Taylor Wimpey has been making hay while the sun shines in recent years. As long as house prices remain stable and the domestic economy stays on track this should continue, but the whole sector will struggle if the market takes a turn for the worse.

Although build cost inflation has moderated recently, probably due to a stronger pound, some of the industry's recent tailwinds are running out of puff. Help to Buy is ending in 2023 and the proportion of sales supported by the scheme is still rising. Those using the scheme accounted for 40% of sales at the last count, and that will leave quite a hole to plug in a couple of years.

Other fundamental factors driving the UK housing market in recent years remain in play though. 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.

Taylor Wimpey's also in better condition than in the past, with a £546m cash pile on the balance sheet. It's worth keeping an eye on the land creditor position though, as the group owed over £700m as of June 2019.

Still, Taylor has demonstrated good strategic planning. It's working hard to improve the way it acquires and uses land. Instead of throwing up houses where it can, Taylor's discerningly chosen to use more large and 'super large' sites going forwards, which makes a lot of sense from a margin perspective.

The final silver lining is near-term plans to increase the dividend remain unchanged, with £610m earmarked as shareholder returns this year. The prospective yield is 9.1%, although a large chunk of this is coming from special dividends, which would be first in the firing line if conditions get tougher.

Overall, Taylor Wimpey has done well and thrived while conditions have been favourable, but the fact remains that an economic upset could knock a substantial hole in Taylor's profits.

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Full Year Trading details

Taylor reports that the UK housing market is proving "stable", despite challenges in London, the South East and at higher price points.

Net private reservations per outlet per week were 0.96 in 2019, compared with 0.80 in 2018. Cancellation rates remained low at 15%, compared to 14% last year, and average private selling prices increased 1% to £305,000.

Over the course of the year build costs increased around 4.5%. As previously guided, Taylor expects to generate operating margins of around 19.6%, compared with 21.6% in 2018.

In line with the group's strategy of working from fewer, larger sites, Taylor operated out of an average of 250 outlets in the year to date, down from 273 in 2018.

The total order book, excluding joint ventures, represents 9,725 homes, worth approximately £2.2bn compared to £1.8bn last year. The short term landbank stands at around 76,000 plots or 4.8 years of supply, and the strategic land pipeline holds around 140,000 plots.

The group ended the year with around £546m of net cash, which is ahead of expectations due to the timing of land investments.

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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 disclosure for more information.