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Taylor Wimpey - Guidance raised on record completions

William Ryder (Equity Analyst) | 4 August 2021 | A A A
Taylor Wimpey - Guidance raised on record completions

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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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In the six months to 4 July, Taylor Wimpey reported revenue of £2.2bn, nearly triple 2020's revenue and 26.8% beyond 2019. This reflected a record number of completions, due in part to delays in the fourth quarter of 2020.

The group will pay an interim dividend of 4.14p per share.

Full year completions are expected to come in near the top end of guidance for between 13,200 and 14,000 homes. Operating profit is forecast to be around £820m, exceeding previous expectations.

The shares were up 4.4% following the announcement

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Our view

Taylor Wimpey's results confirmed that the group's been riding high on the UK's booming housing market. If these conditions persist, the group could end up one of the pandemic's winners.

An aggressive land-buying spree during the second half of 2020 sets it apart from most of its peers who were tightening the purse strings. 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 and demand for homes under the new Help to Buy scheme has been "strong." But with coronavirus variant concerns still on the table, the risk of a pandemic-induced economic hangover hasn't totally cleared. 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 last 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 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, especially considering the Stamp Duty holiday drawdown and the reworked Help to Buy 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 looks manageable to us, if trading normalises as expected.

Taylor Wimpey is in a strong position and boasts a valuation that isn't too demanding. We see the risks of an economic meltdown as relatively mild at this stage, though they can't be discounted completely. That makes the group's bold attitude throughout the pandemic look like an asset that could drive long-term growth for some time to come although of course there are no guarantees.

Taylor Wimpey key facts

  • Price/Earnings ratio: 9.2
  • 10-year Average Price/Earnings ratio: 10.5
  • Prospective dividend yield (next 12 months): 6.5%

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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Half Year Update

Excluding joint ventures, Taylor Wimpey completed 7,303 homes. Operating profits were £424m, reflecting a 19.3% operating margin, which is an improvement from 18.0 in 2019. Cost management, a 14.6% increase in average selling price to £299,000, and the increased number of completions all fed into the rise.

The group sold an average of 0.97 homes per outlet per week from an average of 228 outlets during the period. That's up from 0.70 homes per outlet per week in 2020, but average outlets declined slightly from 237.

As at July 4, Taylor Wimpey's orderbook comprised of 10,344 homes worth £2.6bn, down from 11,686 homes worth £2.9bn in 2020. The group was 97% forward sold for 2021 completions, up from 91% at the same point in 2020. The cancellation rate of 14% was an improvement on 21% in 2020 and in line with pre-pandemic levels.

After adding significantly to its landbank last year, Taylor Wimpey "returned to a more normal replacement level of land acquisition." The group added 5,000 plots to its short-term landbank during the period, bringing to total to 82,000. The long term strategic land pipeline held 147,000 potential plots.

The group finished the half with a net cash position of £906.5m, up from £719.4m at 31 December as cash flow more than covered increased land investment and dividend payments.

Free cash flow was £334m, up from an outflow of £525.8m in 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.