Interactive Investor

Better returns for Taylor Wimpey

11th November 2014 12:15

Lee Wild from interactive investor

Taylor Wimpey remains confident of further significant growth, despite the housing market cooling in recent months. Margins are improving, interest rates are unlikely to rise any time soon, and, importantly, the housebuilder says the feared Mortgage Market Review has not damaged business.

The UK housing market is growing "steadily and sustainably," says the company, so little wonder it is confident of meeting medium-term financial targets. It's certainly improving returns and has just upgraded forecasts for growth in operating margin for 2014 to 400 basis points.

In the year-to-date, sales rates inched higher compared to the same time last year at 0.66 sales per outlet per week, up from 0.65. However, so far in second half, sales rates are about 5% lower than the same time last year at 0.60. The timing of cash payments on conditional land purchases will mean net cash should total £100 million at the end of the year.

Taylor Wimpey's cancellation rates are "historically" low at 13% for the year-to-date, reflecting the strength of growth in the UK housing market. It has sold all of the homes set to be built in 2014, and a quarter of those set to be built in 2015 have been snapped up. Taylor Wimpey's total order book represents 7,814 homes, worth £1.7 billion excluding joint ventures.

"As expected, the introduction of new regulations following the Mortgage Market Review and the recently published guidelines from the Bank of England have not adversely impacted our business and we welcome them as a positive move for the long term health of the market," said the company.

But there has to be a downside in a buoyant market, which for the housebuilders is a 5% year-on-year boost to build costs. These are, however, more than offset by house price inflation.

Moving into the "delivery" phase of its strategy, Taylor Wimpey is now looking at maintaining its short-term land bank instead of growing it.

"We are still operating in the early stages of the housing cycle," added the firm. "The UK housing market continues to show good signs of recovery and the pace of growth has moderated to a more healthy and sustainable level.

"With a reduced risk of interest rate increases in the near term, but also with tighter but sensible regulation, we believe that UK house prices are most likely to closely reflect inflation and recovery in the underlying UK economy. This stable but improving environment should be positive for both homebuyers an homebuilders."

With a 116p target price, Panmure Gordon analyst Rachael Applegate maintains her 'hold' recommendation, saying the stock trades in line with the sector on traditional valuations. It trades on a December 2015 price/earnings multiple of 8.5 times, and a price/net asset value ratio of 1.5 times. The sector trades on 8.6 times and 1.58 times, respectively.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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