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Taylor Wimpey - 500m pounds raised for new opportunities

Nicholas Hyett, Equity Analyst | 18 June 2020 | A A A
Taylor Wimpey - 500m pounds raised for new opportunities

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Taylor Wimpey plc Ordinary 1p Shares

Sell: 162.75 | Buy: 162.85 | Change 1.20 (0.74%)
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Taylor Wimpey has raised £522m by issuing new shares equal to 11% of the company's market cap. Management thinks the COVID-19 pandemic has opened up attractive opportunities to buy land at low prices, and has raised the additional capital to take advantage of this.

Taylor is still not giving detailed guidance, but expects capacity to be "meaningfully" reduced in 2020, before recovering in 2021 although it is unlikely to reach prior levels.

All employees have returned from furlough and the group intends to return all government money used under the scheme, reflecting the strength of current trading.

The shares fell 4.8% in early trading.

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Our view

The fortunes of the housebuilders are tied to the economic recovery.

We don't yet know how many jobs will return permanently once the furlough scheme winds down, or whether we'll enter a sustained recession as a consequence. That could leave housebuilders facing both lower volumes and lower house prices, which would be a brutal combination for profits.

Having said all that, the news coming from the housebuilders has been more positive than we expected a few months ago. Taylor Wimpey has so far managed to keep pricing stable although sales have taken a hit and has raised extra capital to go shopping for cheaper land. Fortune favours the bold, and if the economy recovers this move will set the group up for years of strong returns. However, it's also possible prices will have to fall to keep sales moving forward, in which case investors will regret pouring in the extra funds.

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.

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. Clearly housebuilding has a long term future, but the short term could be tough and individual companies may struggle. We appreciate Taylor's courage though, and only time will tell whether or not they've made the right call.

The market has recognised the risks to Taylor's business and despite some more recent rises, the shares have fallen overall since the outbreak began. The shares currently change hands for 1.5 times book value, although as we've said, book value could be written down if house prices fall far enough.

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Trading update

Taylor Wimpey has completed on 2,531 properties in the 24 weeks ending 14 June, compared with 4,526 in the same period last year. The forward order book currently stands at £2.85bn. As of 14 June Taylor had £646.2m in cash and borrowings of £639.8m, leaving it with£6.4m in net cash.

Taylor's net private sales rate has risen from 0.30 during the first seven weeks of the lockdown to 0.61 in the last three weeks. This compares with 0.97 before the lockdowns began. While the cancellation rate has risen from 15% pre-lockdown to 35% in the last three weeks, prices have remained consistent.

Taylor expects to be operating at around 80% of its pre lockdown capacity by the end of June.

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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.