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Taylor Wimpey - first half loss on lower sales

Sophie Lund-Yates, Equity Analyst | 29 July 2020 | A A A
Taylor Wimpey - first half loss on lower sales

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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's first half revenue fell 56.4% to £754.6m as legal completions fell 58% to 2,713. Combined with higher costs relating to coronavirus, the group made an operating loss of £16.1m, compared with a £311.9m profit last year.

Taylor is now operating at around 80% production capacity and expects full year completions to be down around 40%. Management expects to start paying the ordinary dividend again in 2021.

The shares fell 6.2% 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.

We've seen what this can look like over the last six months when over £500m flowed out of the business, as sales and construction slowed and land purchases continued. More capital was tied up as "works in progress", which isn't an issue as long as the houses can be sold for a profit in the end. It's only if house prices fall that this could become an 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 1.3 times book value, although as we've warned, book value could be written down if house prices fall far enough.

Taylor Wimpey key facts

  • 12m forward Price/Earnings ratio: 11.6
  • Ten year average 12m forward Price/Earnings ratio: 11.0
  • Prospective yield: the dividend is currently suspended

We've introduced this section in response to recent survey feedback.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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First half results

Of Taylor's 2,713 legal completions during the first half 23.5% were for affordable homes. The net private sales rate averaged 0.70 per outlet per week, compared with 1.00 last year. Private average selling prices rose 2% to £307,000 and the total average selling price rose 3.1% to £269,000. The cancellation rate rose from 14% to 21%.

As of 28 June the order book (excluding joint ventures) included 11,686 homes worth £2.9bn, compared with 10,137 homes worth £2.4bn last year. Taylor Wimpey's private homes are currently 97% forward sold, so while management can be confident of this year's completions, 2021 will be held back as construction catches up.

The short term land bank holds around 77,000 plots. The long term strategic land pipeline holds about 138,000 potential plots. The group temporarily stopped land purchases during the lockdown but has now started back up.

Taylor Wimpey ended the first half with net cash balance of £497.3m after raising £510m issuing new shares. The revolving credit facility was fully drawn down during the crisis but has since been repaid.

Taylor Wimpey's net cash outflow from operations totalled £523.7m, largely because of land purchases and increased works in progress as completions fell.

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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.