Despite headwinds, there are some positives here and housebuilders are often first to reflect an upturn in the economic cycle. Our head of markets analyses latest results.
This half-year update from Taylor Wimpey (LSE:TW.) provides further proof, if it were needed, of the tightening shackles which the housebuilders are currently facing.
A brief bounce in fortunes due to the traditionally strong Spring selling season was largely undone by a further interest rate rise, which in turn resulted in higher mortgage rates. This has unsurprisingly driven a reduction in reservations and completions, an increase in cancellations and questions over general mortgage availability and affordability, especially for first-time buyers.
At the same time, bottlenecks in the planning system are causing delays, while build cost inflation remains elevated at around 6%, although down from its more recent highs of between 9% and 10%. Any more recent house price declines have yet to filter through to the cost of land, so Taylor Wimpey has maintained its significantly more selective approach to buying more land and has begun to drip its strategic landbank into play.
The 26% fall in completions for the six-month period ended 2 July also has other effects. Since some of the costs for the business are fixed, the lower number impacts the operating margin, which fell by 6% to 14.4% for the half. While that was still better than expected, each of the key metrics are under some considerable pressure.
The order book has reduced to £2.1 billion from a previous £2.8 billion, net cash has dropped to £655 million from £864 million (although the payment of the final dividend was a major factor) and revenues fell by 21%. Taken together, this resulted in a drop of 44.5% to operating profit and of 21% to pre-tax profit.
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However, there are glimmers of hope on which Taylor Wimpey can build. It has a short-term landbank of 83,000 plots and a strategic pipeline of a further 140,000 plots, giving it considerable leeway and avoiding the need for an immediate buying spree. At the same time, notwithstanding the lower numbers, the average selling price for a property rose by 6.7% to £320,000, offsetting some of the inflationary pressure.
From a broader perspective, the most recent economic data has suggested that inflation may have peaked, which in turn could lead to more stable interest rates (and therefore mortgage rates) in due course. At the same time, the group has pointed out that there remains a major supply and demand imbalance in UK housing, with significant underlying demand for new homes.
Taylor Wimpey has a defined shareholder return scheme, and the increase to the dividend shows signs of management confidence in the strength of the business which, after all, remains profitable. The interim dividend rises to 4.79p, part of the firm's policy to pay out 7.5% of net assets or at least £250 million annually throughout the cycle.
The hike increases the projected dividend yield to 8.4%, which is of some consolation to otherwise long-suffering shareholders, and the stream of dividend distributions is one to which the group remains committed.
In terms of outlook, the guidance is understandably cautious, with operating profit for the year expected to be in the range £440 million to £470 million, which would compare with £923 million the year previous. Net cash is also expected to reduce to between £500 million and £650 million from the previous £864 million, although more positively the likely number of completions is at the upper end of previous guidance at between 10,000 and 10,500 homes.
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The challenges are clear and, for the moment, Taylor Wimpey can only give its full focus and effort to those elements within its control. The share price has suffered as have many others across the sector, with a drop of 11% over the last year comparing to a gain of 3.5% for the wider FTSE100. The fall may not have been as precipitous as seen among some of its competitors (Persimmon (LSE:PSN) shares have lost 39% over the last year, for example) but the immediate outlook is cloudy.
That said, there are those who accept this lack of visibility alongside the cyclical nature of the business, with the market consensus of the shares as a 'buy' reflecting confidence in longer-term prospects.
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