Taylor Wimpey Plc – Operating with a strong balance sheet and cashflow

Taylor Wimpey Plc (LON: TW.) is a residential property developer Company. It operates from 24 regional offices.

Rationale for Valuation – Taylor Wimpey - Hold at GBX 132.75

• 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.
• In FY20, TW is on track, with strong operational momentum and positive forward indicators.
• The Company has increased its confidence in 2021 and also expects to deliver 2021 operating profit materially above the top end of the current consensus range.
• As per valuation metrics, EV/Sales, EV/EBITDA and Price/Earnings multiples of the TW are currently lower as compared to the corresponding multiple of the Homebuilding & Construction Supplies industry.
• The Company recorded a lower debt-equity ratio of 0.03x (H1 FY20) against the industry median, which reflects that TW is less leveraged as compared to the industry.
• From the technical standpoint, shares were trading well above the short-term support level of 50-day (GBX 113.44) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The Company faces a significant risk of availability of raw materials and supplies due to Covid-19 Crisis.
• Changes in the United Kingdom macroeconomic environment may lead to falling demand or tightened mortgage availability.
• Delays or deficiencies in construction could increase costs, reduce sales volumes and selling prices.
• Brexit is also posing a risk to the employment cost for the Company.

Trading Update (as on 9 November 2020)

• In the second half of the year to date, the Company has attained a good sales rate of 0.76 homes per outlet per week.
• 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.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Conclusion

The trading backdrop remains resilient and 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. Currently, 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. Overall, it has a growing high-quality landbank and a robust balance sheet as well as a strong position for strong progress. The stock made a 52-week low and high of GBX 98.12 and GBX 237.70, respectively.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance on Taylor Wimpey at the current market price of GBX 132.75 (as on 9 November 2020, before the market close at 8:06 GMT) and will recommend fresh buying at the right time.

Scottish Mortgage Investment Trust Plc

Scottish Mortgage Investment Trust Plc (LON: SMT) is an FTSE 100-listed closed-end investment Company, with an objective to maximise the total return to investors, while generating real dividend growth through a diversified portfolio.

Investment Highlights – Scottish Mortgage Investment Trust Plc – Expensive at GBX 1,114.68

• The Company has shown a strong financial performance in H1 FY2021, while the operating expenses are increasing, which could hamper the profitability margins in the near future.
• The Company has lower liquidity in H1 FY2021, with a current ratio of 0.26x, reflecting insufficient current assets to pay its short-term obligations.
• From the technical standpoint, 14-day RSI is currently supporting downward movement (around 75.77 level), which means the stock price could decline in the short term.

Key Risks

• Due to uncertainties regarding the Brexit and Covid-19, the consumer confidence dampened and affected the business operations.
• In the recent past, the Company faced challenges due to currency fluctuations in sterling.

Financial Highlights – H1 FY 2021 (30 September 2020) (released on 6 November 2020)

(Source: Interim Report, Company Website) 

• In the first half of the financial year 2021, the Company has delivered a higher gain on investment, which resulted in significantly higher net return/ ordinary share.
• Driven by higher net return, the Company proposed a higher dividend for the period as compared to H1 FY2020.
• The Company’s cash position increased significantly to £77,956 thousand as on 30 September 2020, along with well-positioned balance sheet.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Conclusion

The Company has shown a strong financial performance in the first half of the financial year 2021 while delivering on the quantified objectives. The political instability in the UK has reduced transaction activities, while prospects of London market still seems to be bright in the long-term. In the short-term, the portfolio remains challenging, due to covid-19 crisis, while the Company is optimistic about the underlying and aggregate progress of the portfolio. SMT is focussed on identifying attractive prospects to deploy the excess liquidity. Moreover, the Company’s stock is trading near a 52-week high, raising doubts at the upside potential at the current price level. The stock made a 52-week low and high of GBX 451.80 and GBX 1,096.00, respectively.

Based on the factors as highlighted above, we believe the stock of Scottish Mortgage Investment Trust Plc is “Expensive” at the current price of GBX 1,114.68 (as on 9 November 2020, before the market close at 8:25 AM GMT), with support from few catalysts needs to be evaluated at a later stage such as decent prospects of London market and improved investors sentiments.

*Dividend Yield may vary as per the stock price movement.

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