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Taylor Wimpey - full year to be in line with market expectations

Sophie Lund-Yates, Equity Analyst | 14 January 2021 | A A A
Taylor Wimpey - full year to be in line with market expectations

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Taylor Wimpey plc Ordinary 1p Shares

Sell: 162.40 | Buy: 162.55 | Change 0.15 (0.09%)
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Taylor Wimpey expects full-year underlying profit of £293m, in line with market expectations.

The group finished the year near normal levels of production capacity and with over 50% of its 2021 private completions forward sold. As of 31 December 2020, its order book, less joint ventures, was worth £2.7bn, a 23.3% increase on 2019.

The shares were little moved early trading.

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Our view

Housebuilders have held up better than we expected back in March. They're entering 2021 in two groups: the cautious and the bold.

The latter describes Taylor Wimpey, after an aggressive land-buying spree during the second half of 2020. The group saw an opportunity to snap up swathes of well-priced land and raised extra capital to do so. It's a move that could yield strong returns well into the future - if the housing market holds up.

That is of course a big "if". So far, Taylor Wimpey's management sees no signs of demand for new houses slowing despite a third national lockdown. But the big question on our minds is whether this shutdown will be enough to topple the precarious economic recovery. A prolonged economic downturn could drive house prices lower and turn the group's aggressive land-buying strategy into an expensive mistake.

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.

A strain on cash would put Taylor Wimpey's dividend on the chopping block--as we saw earlier this year. For now, the group has more than enough cash to cover its dividend payments, but that could change quickly if economic conditions decline.

That's a worst-case scenario, though. The housing market appears to be on stable footing for now. 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.

While the end to the stamp duty holiday and a more restrictive Help to Buy scheme are key risks in the near-term, we were encouraged to see the group took 650 reservations for completion in the second quarter under the new scheme.

Taylor Wimpey's balance sheet is in good shape and the group can deploy its cash reserves to develop its land acquisitions this year. Management is committed to achieving margins between 21% and 22%, which should be possible as long as no further Covid-restrictions are put in place.

Taylor Wimpey is in a much better spot than we would have expected given everything that's happened in the last year. But it's not out of the woods yet. The economic environment is still crucial, and while Taylor looks well positioned in a buoyant market, the group could be in trouble if conditions sour.

Taylor Wimpey key facts

  • 12m forward Price/Earnings ratio: 11.0
  • Ten year average 12m forward Price/Earnings ratio: 10.8
  • Prospective yield: 4.9%

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

Total UK home completions fell 39% to 9,609 in 2020, 20% of which (1,904) were affordable homes. The decrease was largely attributed to Covid-related disruptions in the second quarter. Average selling prices on private completions rose 6% to £323,000. A change in mix helped the overall average selling price rise 7% to £288,000.

The group's net private reservation rate of 0.76 was below 2019's 0.96, and full-year cancellation rates were higher than usual at 20%, compared to 15% in 2019. However, during the fourth quarter cancellation rates normalised at 16%.

In Spain, management believes travel restrictions have delayed a recovery, resulting in 190 completions in 2020, compared to 323 in 2019. Average selling price also declined to €375,000 from €429,000.

The group stepped up its land-buying during the second half, because it saw "high quality land became available at attractive margins". Taylor Wimpey finished the year with a short term landbank of 77,000 plots and a strategic land pipeline with 139,000 potential plots. The group has authorised £1.3bn worth of gross land purchases made up of 93 sites and 22,600 plots, following its June 2020 equity raise. Management believes it has the potential to return 34% on employed capital.

Taylor Wimpey finished the year with £719m of net cash, compared to £545.7m at the end of 2019. The group plans to reduce net cash over the next year as the new land is developed.

The group is also expecting to recommence its ordinary dividend payments in 2021, including the 2020 final dividend.

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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 disclosure for more information.