After announcing it was closing construction sites on 24 March, Taylor Wimpey is targeting a phased reopening beginning 4 May. Sales offices will remain shut for the time being.
Since closing sites and offices, cancelations have affected only 0.8% of the order book, which has actually grown over the period by more than 200 units to 10,880, or £2,677m. Prices were comparable to those achieved prior to the lockdown.
The shares rose 6.0% in early trading.
In our view, many people are likely to delay moving house for at least the next few months. Furthermore, potential job losses and corporate bankruptcies could cause financial hardship to many, and buying a new house could well be wiped off to-do lists. That means housebuilders face both lower volumes and lower prices if the disruption is sustained or we enter a prolonged recession.
Interestingly, Taylor Wimpey has managed to keep pricing stable during the lockdown, although sales have taken a hit. This is a positive development, and we hope pricing can be sustained while sales recover. However, it's also possible prices will have to fall to keep sales moving forward.
Housebuilders have masses of capital tied up in land, raw materials and homes at various stages of completion. If house prices fall far enough these can't be sold at a profit and their value will be written down. If volumes also decline the problem is compounded, and cash flow can quickly become a real issue.
That's why Taylor is taking drastic measures to keep cash within the business. The group has suspended all dividend payments and fully drawn down its available credit lines. It's worth keeping an eye on the land creditor position though, as Taylor Wimpey has promised to fork out over £700m which doesn't show up in net debt.
Taylor looks like it probably has enough immediate liquidity on hand to ride out disruption, provided it's short lived. Management seem to be more confident, and are talking about using the cash they've saved to take advantage of new opportunities. We hope the optimism isn't misplaced, but if we get a smooth economic recovery this attitude should be a benefit.
Other fundamental 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. In the long term we expect the housebuilding sector to be fine, but the short term could be tough and individual companies may struggle.
The market has recognised the risks to Taylor's business and the shares have fallen heavily since the outbreak began. The shares currently change hands for 1.3 times book value, although as we've said, book value could be written down if house prices fall far enough.
Overall, Taylor Wimpey has done well while conditions have been favourable. But the current economic upset could knock a substantial hole in Taylor's profits, and if sustained could still prove an existential threat.
As of 22 April Taylor Wimpy held a cash balance of around £836m, after drawing down on its entire £550m Revolving Credit Facility. The Treasury has confirmed in principal that the group is eligible for the Covid Corporate Financing Facility.
Land purchases were put on hold last month, but the Taylor is now looking at new opportunities again. At the end of March the short term land bank stood at around 78,000 plots, and the strategic land bank held 137,000.
Management still considers the environment to be too uncertain to provide detailed guidance.
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