018 saw Taylor Wimpey’s (TW)
share price drop 35% as Brexit fears hit hard. November was particularly painful for the homebuilder as continued political turmoil and a weakening housing market sent the stock tumbling almost 20%.
Yet shares jumped 6% on Wednesday to close at 149.10 as a reassuring trading update gave shareholders hope. With fellow house builders Persimmon (PSN.L)
and Barratt (BDEV.L)
also experiencing a lift, Taylor Wimpey could be in better shape than the share price suggests.
Taylor Wimpey delivers strong trading update
In Wednesday’s trading statement, Taylor Wimpey confirmed it was on course to meet its performance targets for the year.
Total home completions rose to 14,947 (including joint ventures) in 2018, with the value of the total order book coming in at £1.78bn at the year end, a bump from the £1.63bn seen in the previous year. Taylor Wimpey’s strategic land pipeline stood at 127k plots, up 8.5%.
“Despite wider macroeconomic uncertainty, the housing market remained stable during 2018 and we had a good trading performance”, said Peter Redfern, the company’s chief executive. Redfern himself last month picked up 745,846 shares for a cool £1 million, indicating his own faith in the company’s future.
|PE Ratio (TTM)
Taylor Wimpey stock vitals, Yahoo finance, as at 14 January 2019
What’s weighing on the share price?
1. Cautious home buyers ahead of Brexit
Given the current Brexit-driven uncertainty, it’s understandable that potential home buyers are cautious about parting with their cash. In this month’s trading update, Taylor Wimpey singled out ‘increasing customer caution’ in London and the south east – where house prices had enjoyed an annual average growth of 7.5% between 2009 and 2017 – as an area for concern.
Despite this, Taylor Wimpey’s order book was up in 2018, with over 40% of purchases coming from first-time buyers. Helping things along has been the government’s Help to Buy scheme. Good news then that Phillip Hammond has extended the scheme until March 2023.
2. Slowdown in house prices
Taylor Wimpey’s average selling price was flat at £264,000 reflecting the general malaise in the housing market across the country. The company can take cold comfort that at least this was higher than December’s average UK house price of £212,281. December also saw the growth rate in house prices slow to 0.7%, its lowest since February 2013. Any further slowdown could pile more pressure on home builders across the board.
3. Debt worries
In a volatile market, Taylor Wimpey’s £118m worth of debt will raise a few eyebrows among investors doing a thorough risk/reward analysis. After all, an unsustainable debt level could prove damaging should the market enter recession. However, with an EBITDA of £838 million and operating cash flow covering total debt twice over, Taylor Wimpey’s underlying financials look to be solid, providing a degree of resilience should there be a post-Brexit slump in the housing market.
Value of Taylor Wimpey debt
Is there opportunity in Taylor Wimpey’s share price?
Over the past five years, Taylor Wimpey has proved resilient to market cycles, delivering an average earnings growth rate of 19% and ahead of the 14% market average. It also has a monster forward dividend yield of 12%, one of the highest on the FTSE 100. Crucially, the company confirmed that it expects to return £600 million, or 18.3p a share, in dividends to shareholders in 2019.
Investors will now need to decide if a reversal in the share price is on the cards once the terms of the UK’s departure from the EU are finalised, or if there are further falls in store. At Taylor Wimpey the view is that the political headwinds may be overstated.
“People look at these big political situations and at first they’re nervous but after a while, they tend to want to get on with life,” said CEO Peter Redfern, noting that an increase in mortgage rates would have been more damaging. As it stands, mortgages are at their cheapest in years.
As the Brexit deadline looms, investors will now be preparing to scrutinise the company’s full-year numbers when they come out on 27 February.
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