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Taylor Wimpey - exceeding expectations

Nicholas Hyett, Equity Analyst | 9 November 2020 | A A A
Taylor Wimpey - exceeding expectations

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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 will continue construction through the UK's second lockdown, and will be able to receive customers in sales centres and show homes. Construction is running at close to normal levels.

Management expects full year operating profit for 2020 to be towards the top end of market expectations of between £242m and £292m. Management also expects operating profit to be materially above the top end of analyst estimates in 2021, i.e. above £626m.

The shares rose 8.2% in early trading.

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Our view

The news coming from the housebuilders has been much more positive than we expected back in March. Prices have held up, sales rates have mostly recovered since lockdown and Taylor has raised extra capital to go shopping for cheaper land. They say 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 house prices will fall if we enter a sustained recession, 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 saw what this looks like earlier this year, when over £500m flowed out of the business as sales and construction slowed and land purchases continued. Capital was also tied up as larger amounts of "works in progress", although that's not an issue as long as the houses can eventually be sold for a profit.

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. Though the Help to Buy scheme is due to get more restrictive, and it's been on the horizon for a while.

Following the recent capital raise Taylor Wimpey's balance sheet is in good shape. Management plans to use the new firepower to buy land. It's a bold strategy, but we can see the logic.

Taylor Wimpey is in a much better spot than we would have expected given everything that's happened this year, but it's not out of the woods yet. The economic environment is still crucial, and while Taylor is well positioned to benefit from a strong recovery, if it stalls the group could have a tough time ahead.

Taylor Wimpey key facts

  • 12m forward Price/Earnings ratio: 11.3
  • Ten year average 12m forward Price/Earnings ratio: 10.8
  • Prospective yield: 5.5%

All ratios are sourced from Refinitiv. 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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Trading update

Taylor Wimpey's sales rate in the second half has been 0.76 homes per outlet per week, compared with 0.93 last year. Cancellation rates have fallen but remain higher than last year at 20%, compared with 15% last year. The order book stands at 11,530 homes worth £3.0bn, an increase on the 10,486 homes worth £2.7bn last year.

During the second half Taylor has authorised the purchase of c.14,500 plots of land for £826m, which is ahead of usual land buying rates. The short term landbank currently contains c.78,000 plots and the strategic landbank holds c.137,000. Management intends to keep buying land at an accelerated pace.

The Spanish business is not expected to return to normal operations until 2022, and the order book has fallen from 296 homes last year to 186 at the start of November.

Taylor expects to end the year with between £550m and £750m in net cash, depending on the timing of land purchases. The land creditor position is also expected to have grown. Management expects to resume dividends in 2021, starting with the final dividend in respect of 2020.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.