Taylor Wimpey PLC (LON: TW) – Improving efficiency to deliver enhanced shareholder value in the years ahead.

Taylor Wimpey PLC is a FTSE 100 listed residential property developer, which builds a wide range of properties in the different price range. It produces both private and affordable homes. The Company operates from 24 regional offices across the United Kingdom, with further operations in Spain. It builds around 15,000 high quality new homes in a year across the UK. The operations of the Group are differentiated in four segments, namely London & South East, Central & South West, and Spain.

On 14 January 2021, the Company expects to provide its next trading update, and on 2 March 2021, it is likely to announce FY20 results.

Growth Prospects and Risk Assessment

The Company is now operating nearly at normal capacity with a product profile well positioned to meet customer demand. It has excellent customer and construction quality scores, which reflects the potential to serve customers in a responsible manner. The year-to-date Construction Quality Review score is 4.37, and it is confident of returning to a 5-star rating in the current customer care year. Current dividend yield stood at around 2.4%.

Meanwhile, the quick recovery of the housing market and resilient trading is testament to the underlying strength of demand and supportive lending backdrop. Taylor Wimpey has a growing high-quality landbank and a robust balance sheet, which is likely to grow the business further whilst generating compelling returns. It is well-positioned for strong progress and delivers enhanced shareholder value with a renewed focus on costs and efficiency.

 (Source: Company Website)

However, the Covid-19 pandemic is one the emerging risk which has been directly impacting the business. Moreover, it can reduce mortgage affordability and housing demand. The disruption to the supply chain can also increase material costs. Adjacently, the performance is also subject to the change in government policy and planning regulations as it can affect the value of land purchasing. Furthermore, Brexit is also posing a risk to the employment cost for the Company.

Industry Outlook Dynamics

The housing market fundamentals remain attractive as the lending environment continues to be positive with a broad spread of lenders supporting homebuyers and greater competition in the mortgage market. The mortgaged application in the UK surged to 12-year high as it was fuelled by additional demand for space during the Covid-19 lockdown. The average home price in the UK rose to £ 244,513 in September 2020, reflecting a 1.7% rise from August 2020. Moreover, the stamp duty holiday has been incentivizing buyers and vendors to close deals before the March 2021 ends. As a part of the stamp duty holiday measure, the threshold for stamp duty has temporarily increased from the previous rate of GBP 125,000 to GBP 500,000.

As per the publication from the Research and Markets, the market size of the UK construction industry is projected to register a CAGR of ~8.5% between 2019 to 2024 and reach around GBP 236.8 billion by 2024; however, the market growth is dependent upon the consumer spending, and economic recovery following the pandemic impact.

 (Source: Presentation, Company Website)

 A Glimpse of Business Segments

(Source: Company Website, chart created by Kalkine Group)

Trading Update (as on 9 November 2020)

• In the second half of the year to date, the Company made good progress, with building a strong forward order book and maintaining a robust sales rate.
• During the second half of the year to date, the Company has attained a good sales rate of 0.76 homes per outlet per week. While, for the year to date, it has achieved a good sales rate of 0.73 homes per outlet per week.
• Further, it expects rates to improve, with several sites selling for completions in Q2 FY21, and an increase in construction in the upcoming months.
• For the year to date, the cancellation rates were reduced but still stayed slightly above the normal levels.
• It has opened 56 outlets on a year to date basis and operated on an average of 239 outlets (2019: 252).
• The Company witnessed strong customer forward indicators and sales, with an increase in the order book of 11% year-on-year.
• As at the end of October 2020, the short term landbank was approximately 78 thousand plots, and the strategic land pipeline stood at around 137 thousand potential plots.
• On 1 November 2020, the order book for the Spanish business was 186 homes.
• The Company has shown a strong balance sheet & cashflow and expects a net cash balance between £550 million and £750 million at the end of 2020.
• The trading backdrop remains resilient with a quick recovery of the housing market in the second half of 2020, supported by low-interest rates and stable mortgage lending.
• Despite the impact of Covid-19, the Company is on track to deliver FY20 results towards the upper end of market expectations and made good progress in operational performance.
• With the sites operating at normal capacity, the Company has shown a strong order book and resilient customer demand.
• It expects 2021 completions to be in the range of 85%-90% of 2019 levels.
• Assuming the market remains stable, the Company now expects to deliver 2021 operating profit materially above the top end of the current consensus range.
• The Company also expects to recommence dividend payments in 2021 and will review the special dividend in 2021 for payment in 2022.

Financial Highlights (for the period ended 28 June 2020 (H1 FY20), as on 29 July 2020)

(Source: Company Website)

• The order book increased by 15% year-on-year as of 28 June 2020, with a value of £2,904 million.
• The Company was affected by the closing of sites and sales centres, but now all the sites are reopened, and the Company has returned to a sustainable level of sales.
• For the first half of 2020, the Group’s revenue was down by 56% to £754.6 million (H1 FY19: £1,732.7 million), due to the unprecedented impact of COVID-19 on the Group.
• UK volumes were reduced by 57.8% (excluding JVs) to 2,713 completions (H1 FY19: 6,432) with an increase of 3.1% in UK average selling prices.
• In the UK, the average selling prices on private completions surged by 2% as compared with the corresponding period of the last year, driven by larger average plot sizes, and an increased proportion of completions from the Southern businesses (versus 2019).
• Led by the decrease in volumes and additional costs in relation to COVID-19, the operating loss reported at £16.1 million (H1 FY19: profit of £311.9 million profit).
• However, the tangible net asset value per share increased by 0.6% to 102.8 pence against the same period last year (H1 FY19: 102.2 pence).
• The Company ended the period with £497.3 million of net cash, having raised approximately £510 million in net proceeds through an equity raise in June 2020 for investment in land opportunities over the next twelve months.
• In the first half of 2020, the Group achieved an annual return on net operating assets of 16.8% ((H1 FY19: 29.4%).

 Share Price Performance Analysis

On 7 December 2020 (before the market close, at 8:45 AM GMT), Taylor Wimpey PLC shares were trading at GBX 152.50, down by 5.34% against the previous day closing price. Stock 52-week High was GBX 237.70 and Low of GBX 98.12, respectively.

From the technical standpoint, the shares were trading above the short-term support level of 20-day (around GBX 158.16), 50-day (approximately GBX 131.85) and 100-day (around GBX 125.47) simple moving average price. Also, the MACD line is placed above the central line, indicating a bullish setup. The Company’s stock has delivered a positive return of around 31% in the last month.

In the last two years, Taylor Wimpey’ stock price has delivered a positive return of ~ 25.20% return as compared to positive ~ 14.56%  return of FTSE All Share Household Goods index and a negative ~3.42% return of FTSE 100 index, which shows that the stock has outperformed the benchmark sector and the index.

In the last three months, Taylor Wimpey share price has delivered around 40.27% return as compared to the approximately 13% return of FTSE 100 index, which shows that the stock has outperformed the index during the last three months.

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Business Outlook Scenario

Since reopening after the second quarter shutdown, the housing market has revived well since despite the wider uncertainty. The underlying demand continues to be resilient, supported by very low interest rates. Moreover, customers have benefited from the Stamp Duty Land Tax holiday and the short-term extension to the current phase of the Government's Help to Buy scheme.

Taylor Wimpey continued to operate through a pre-booked appointments model and achieved a good sales rate of 0.76 homes per outlet per week in H1 FY20, and it expects the rates to improve further. Moreover, the cancellation rates for the year to date have continued to reduce; however, it remained slightly above normal levels at around 20%. As of 1 November, total order book represented 11,530 homes, which shall manage short term market uncertainty and price.

Looking ahead, the Company expects the market to support robust sales rates and for prices of new build homes to remain supportive. It is encouraged by the Government's ongoing support for the housing market, home ownership and, specifically, first time buyers. Moreover, as the Company has nearly returned to the normal level, it now expects FY21 completions to be between 85-90% of 2019 levels. It also anticipates delivering operating profit in FY21 materially above the top end of the current consensus range.

(Source: Presentation, Company Website)

FY20 results are expected towards the upper end of market expectations, and considering the robust sales rates, strong operational momentum, solid order book, resilient customer demand, robust balance sheet, growing high-quality landbank, decent first-half performance, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Taylor Wimpey at the current price of GBX 152.50 (as on 7 December 2020, before the market close at 8:45 AM GMT), with lower-double digit upside potential based on 2.34x EV/NTM Sales (approx.) on FY20E sales (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

* The dividend yield is subject to change as per the stock price movement.

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