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Taylor Wimpey - getting back up to speed

Sophie Lund-Yates, Equity Analyst | 5 June 2020 | A A A
Taylor Wimpey - getting back up to speed

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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 has now opened the majority of its show homes and sales centres in England, with most construction sites operating across both England and Wales. The group's poised to do the same in Scotland. All employees have returned from furlough.

The group said it has seen a strong level of demand for appointments at its sales centres, particularly through online channels.

The shares rose 3.3% 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 might have expected a few months ago. Taylor Wimpey has so far managed to keep pricing stable 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 has taken measures to keep cash within the business. The group has suspended all dividend payments and fully drawn down its available credit lines. Taylor looks like it probably has enough immediate liquidity on hand to ride out the current 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. Clearly housebuilding has a long term future, but the short term could be tough and individual companies may struggle.

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 1.6 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

Total group completions in the 22 weeks to 31 May were 2,455, compared with 4,052 last year. The group made 0.72 net private sales per outlet per week in the same period, compared with 0.99 in 2019.

The forward order book stands at £2.8bn, representing 11,228 homes of which 69% are exchanged. This compares with £2.5bn representing 10,557 homes at the same point last year. The group said cancellation rates stayed low during the crisis, representing 5% of the private order book, compared with 6% in the same period last year.

Taylor has suspended land purchases during the lockdown, but is now active in the market again and has contracted on a small number of purchases.

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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.