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Can Taylor Wimpey's share price build on its recent success?

Taylor Wimpey's [TW] share price opened the year at 195p. It climbed to a high of 236p on 19 February before plunging to 101p in early April.

The housebuilder’s share price is down 27.3% so far in 2020 (through 2 July) after the COVID-19 pandemic forced it to close its show homes, sales centres and construction sites.

Housebuilder share prices have been some of the hardest hit amid the pandemic-induced sell-off, given that they are tied to the health of the UK economy.

However, a recent business update Taylor Wimpey struck a positive tone, as it noted a very high level of demand across showrooms and sales centres that it had begun to reopen on an appointment-only basis. The news sent Taylor Wimpey's share price up 1.6% to 161p on 5 June, however, since then the stock has fallen back down to 143.25p. Can the company build its share price back up?  

 

 

Rising demand in the UK housing market

After weeks of inactivity, Taylor Wimpey announced on 13 May that it was planning to reopen sites later that month.

Since then the company has noted a "very high level of demand". Its UK net sales rate increased to 0.51 for the week ending 31 May compared to 0.85 this time a year ago.

Its forward order book also looked strong — it was valued at £2.7bn at the end of May, it had stood at £2.5bn in 2019. These factors helped its share price steadily climb to 166p by 8 June.

Buoyed by signs of a recovering market, Taylor Wimpey announced on 17 June that it was raising £500m in a share placing.

It stated that disruption in the land market because of the pandemic had created "short-term opportunities to acquire land at attractive returns and prices below COVID-19 levels".

The group eventually raised £522m, but its share price fell on the news to around 145p. Some analysts lamented the need for investors to stump up cash for a business with a strong balance sheet.

Others raised concerns about the group's financial position. Richard Head, writing in the Motley Fool, noted that the firm owes £650m to land creditors — £125m is due in 2020 with a further £270 the following year.

"The fact Taylor Wimpey isn't borrowing any more money suggests to me that banks won't lend — or that management is preparing for a more serious downturn. I expect profit forecasts to fall," Head said

“The fact Taylor Wimpey isn't borrowing any more money suggests to me that banks won't lend — or that management is preparing for a more serious downturn. I expect profit forecasts to fall” - Richard Head

 

A land-buying spree

David O'Brien at Goodbody, on the other hand, believes the move showed that Taylor Wimpey expects the market environment to support robust sales rates and for prices of new build homes to remain broadly stable, according to Proactive Investors.

He also expects the returns on land acquisitions to be relatively attractive.

"Fortune favours the brave, and its raise for a land-buying spree may look an inspired call," added Russ Mould, investment director at AJ Bell. "Part of the reason housebuilders have been so profitable in recent years, alongside the Help to Buy scheme, strong supply/demand dynamics and the availability of cheap mortgages, is they acquired land cheaply in the wake of the financial crisis.

Clearly, management feel there is a finite window of opportunity, which they intend to take full advantage of with these new funds. With at least a couple of years between buying the land and completing a build, Taylor Wimpey has time for the housing market to recover."

“Clearly, management feel there is a finite window of opportunity, which they intend to take full advantage of with these new funds. With at least a couple of years between buying the land and completing a build, Taylor Wimpey has time for the housing market to recover” - Russ Mould, investment director at AJ Bell

 

However, there's also the question of whether people will have the financial confidence to keep buying houses amid an expected downturn.

"We don't yet know how many jobs will return permanently once the furlough scheme winds down, or whether we'll enter a sustained recession. That could leave housebuilders facing both lower volumes and lower house prices, which would be a brutal combination for profits," Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, said.

Price forecasts don't look encouraging. Analysts at Zoopla forecast UK house price growth of 2% year-on-year over the next three months but expect a fall in demand due to unemployment, lender caution and more limited mortgage availability.

However, strong market fundamentals remain such as a major housing shortage and cheap mortgages from record low-interest rates.

If Taylor Wimpey can get over these short-term wobbles, then expect its strong market fundamentals to help it keep building, and with it bolster Taylor Wimpey’s share price.

“We don't yet know how many jobs will return permanently once the furlough scheme winds down, or whether we'll enter a sustained recession. That could leave housebuilders facing both lower volumes and lower house prices, which would be a brutal combination for profits” - Sophie Lund-Yates, equity analyst at Hargreaves Lansdown

 

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