Taylor Wimpey Plc - Returning to strong cash generation with lower debt level against industry

Taylor Wimpey PLC (LON: TW.) is a FTSE 100 listed residential property developer. The Company operates from 24 regional offices across the United Kingdom, with further operations in Spain.

On 11 November 2020, the Company will announce the trading update.

Financial Highlights (H1 FY2020)


(Source: Company Website)

On 29 July 2020, the Company provided a half-year result for the period ended 28 June 2020, with the strong total order book. 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. The revenue for the first half of 2020 declined by 56.4% year-on-year. It also reported a loss in H1 FY20. The Company has completed 2,771 homes in the period, which was impacted by site closure. However, the Company also raised approximately £510 million through equity for investment in attractive land opportunities. Moreover, the order book increased by 15% year-on-year as of 28 June 2020, with a value of £2,904 million. During the period.

One Year Share Price Chart


1-Year Chart as of 21 August 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Key Risks

The macro-economic impact of COVID-19 could decrease mortgage affordability and therefore impact on demand for housing. Moreover, COVID-19 increases the risk of reputational damage. The performance is also subject to the change in government policy and planning regulations as it can affect the value of land purchasing.

Valuation Methodology



Recommendation: Taylor Wimpey– BUY at GBX 120.65

The Company expects to end FY20 in a net cash position in the range of £550 million to £750 million. The Board believes that Taylor Wimpeyexpects to grow in the medium term as opportunities and pipeline appear to be at a high level. However, there is a high degree of uncertainty in the short-term period from both Covid-19 pandemic and Brexit. Meanwhile, the order book has increased in H1 FY20, and the demand for a home purchase has been robust.

According to the UK housing market, the market is experiencing a sudden spike in property prices since the easing of lockdown. The UK Chancellor (Rishi Sunak) announced holiday on stamp duty till 31 March 2021, which also seems to have increased the confidence of the potential home buyers and also the future for the housing sector looks promising in the near term. UK businesses has shown a slight uptick in economic activities as the lockdown was lifted in July 2020. The stock made a 52-week low and high of GBX 101.00 and GBX 237.70, respectively. On an MTD basis, the stock of TW has provided a return of 1.22%. From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Buy” recommendation on Taylor Wimpey at the closing market price of GBX 120.65 (as on 21 August 2020) with lower double-digit upside potential based on 1.75x EV/NTM Sales (approx.) on FY20E sales (approx.).

Bellway Plc – Operating with Strong Forward Order Book; Net Margin and ROE Higher than Industry

Bellway PLC (LON: BWY) is a FTSE 250 listed residential property developer. It is engaged into housebuilding and caters the population across England, Scotland, and Wales regions. The Company sell their homes through two main brands, namely Bellway and Ashberry.

On 20 October 2020, the Company will announce the preliminary results for FY20.

Trading Update

On 11 August 2020, the Company provided a trading update for the year ended 31 July 2020 ahead of the preliminary results. The Company announced that all the outlets are now reopened, and it is supporting the safe resumption of sales activity. The number of housing completions decreased by 31% year-on-year to 7,522 in FY20 (FY19: 10,892), due to site closure during the lockdown period. However, in July weekly private reservation was encouraging, and the demand was supported by the ongoing availability of the Help-to-Buy scheme. According to the final position, the Company has a resilient balance sheet, with £545 million in committed bank facilities and £1 million in net cash. Once they get more certainty with regards to the economic outlook, the Board of Bellway is keen to resume dividend payments.

One Year Share Price Chart


1-Year Chart as of 21 August 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Key Risks

The next phase of lockdown in the wake of the second wave of COVID-19 outbreak could result in lower demand, a shortage of labour and shut down of operations.The unemployment rate is likely to increase in the country owing to COVID-19 pandemic. Consequently, consumer spending is likely to reduce in the near to medium term, which might dent the demand.

Valuation Methodology



Recommendation: Bellway – BUY at GBX 2,387

The Company has seen a solid platform for FY21 with a strong forward order book (6,588 homes with a value of £1,760.2 million). However, the economic outlook is uncertain, but the sales demand is encouraging. The Company witnessed a strong balance sheet and a rising rate of private homes. Moreover, the rising demand for housing is supported by the ‘Help to Buy’ scheme. According to the market, the UK housing market started to show signs of revival. This could be because of the release of pent-up demand from the period of lockdown in the housing sector. Furthermore, the government had launched many support schemes to help the businesses stay afloat through the coronavirus crisis. The stock made a 52-week low and high of GBX 1,735.50 and GBX 4,336.00, respectively. From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Based on the decent growth prospects and the valuation done using the above method, we have given a “Buy” recommendation on Bellway at the closing market price of GBX 2,387 (as on 21 August 2020) with lower double-digit upside potential based on 10.53x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

 
*All forecasted figures and Industry/Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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