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Taylor Wimpey-building on strong post-pandemic demand

Sophie Lund-Yates, Equity Analyst | 2 March 2021 | A A A
Taylor Wimpey-building on strong post-pandemic demand

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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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Full year revenue fell 35.7% to £2.8bn, reflecting reduced completions because of the pandemic. As a result, underlying operating profit declined 64.7% to £303.3m. Results were in-line with market expectations.

Volumes are expected to recover to 85-90% of 2019 levels in the current financial year. Combined with slightly lower build cost inflation, operating margins are predicted to increase to 18.5% - 19.0%.

The group's resumed its ordinary dividend policy to pay out around 7.5% of net assets. A final dividend of 4.14p was announced.

The shares rose 2% in early trading.

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Our view

Housebuilders have held up better than we expected over the past year. They've entered 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 the approaching end to the Stamp Duty holiday and revamped Help to Buy scheme. But the big question on our minds is whether we're marching toward a pandemic-induced economic hangover. 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 and the housing market appears to be on stable footing. 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 and the potential reintroduction of widespread 95% mortgages could go a long way in boosting demand.

We were encouraged by the strength in Taylor Wimpey's order book, particularly beyond the end of the second quarter, when the Stamp Duty holiday no longer applies and the Help to Buy scheme has shifted.

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 looks manageable to us, if trading normalises as expected.

Taylor Wimpey is in a much better spot than we predicted. 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

  • Price/Earnings ratio: 10.9
  • 10 year average Price/Earnings ratio: 10.7
  • Prospective dividend yield (next 12 months): 5.2%

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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Full year results

Total completions fell 38.9% to 9,799, primarily due to production shutdowns in the second quarter, 20% of that figure was affordable homes. The group sold an average of 0.76 private homes per outlet per week in 2020, down from 0.96.

The overall average selling price rose to £288,000 (2019: £269,000), with the average selling price on private completions up 5.9% to £323,000. So far this year the group has "achieved selling price growth in the first two months of the year."

Underlying build cost inflation was 3.0%, down from 4.5% in 2019. But this wasn't enough to offset the lower revenue and investment in efficiency changes, so operating margins fell to 10.8% from 19.6%.

The group's forward order book (excluding joint ventures) increased to 10,685 homes, valued at £2.7bn. That includes a "healthy" mix of sales extending beyond the end of the stamp duty holiday and into the next phase of the Help to Buy scheme. Private completions are over 50% sold for 2021 and the total UK order book excluding joint ventures is £2.8bn.

The group's landbank contains the land necessary for 8.1 years' worth of future development (2019:4.8) and includes 77,435 short term plots worth £2.5bn. Total potential revenue from the landbank rose £1bn to £54bn.

Net cash rose to £719.4m from £545.7m. The increase was due, in part, to the £510.1m worth of new shares issued in June. Land creditor obligations decreased 7.3% to £675.9m.

Taylor Wimpey is still aiming for operating margins of around 21% - 22% in the medium term. The efficiency programme is expected to generate £16m worth of cost savings, beginning in 2021.

The group is setting aside £125m to pay for fire safety improvements on apartment buildings built within the last 20 years.

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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.