A Taylor Wimpey PLC (LSE:TW., Financial) housing development not far from where I live recently finished construction. Curious to see if the noise pollution was truly over, I went to check out the site. I found that the houses were on sale and looked to be of good quality. Overall, the development seems to be an attractive place to live. Some houses had even sold already.
I’m not in the market for a new house, but I’m always in the market for new investment ideas. Looking at the stock price, Taylor Wimpey, which is Britain’s third-largest homebuilder, has underperformed all U.K.-listed peers since March. That’s despite the company raising guidance for completion volumes this year. The comany's second-half results back in August showed robust operating margins, better than most of its peers.
So why has the market not been enthusiastic about Taylor Wimpey? It seems that a capital raise of 515 million pounds ($704.7 million) in June 2020 annoyed many investors who thought Taylor’s balance sheet was already strong enough to withstand the pandemic. Taylor’s argument was that it saw an opportunity to buy up land at bargain prices, but the macroeconomic outlook was very uncertain. In my view, the equity raise was justified.
The recovery in Taylor’s profits since the lockdowns last year has been quick due to strong demand for housing thanks to a stamp duty holiday. Housing is still expensive in the U.K., so there is a need for new supply.
Taylor is set to generate pre-tax profits above pre-pandemic levels by next year. Already, as at early August this year, Taylor Wimpey had forward sold 99% of homes due for completion this year, a rate already better than its pre-pandemic level.
The stamp duty holiday recently finished, but costs and savings are usually just factored into the house price anyway, so I don’t see it making prices significantly more expensive. Demand should hold up because we still have very low interest rates, and we now see higher loan-to-value ratios on mortgages than previously.
Inflation was seen in building material and wage costs in the first half of the year, adding 1.7% to costs, but Taylor saw faster house price growth, so operating margins still grew by 2.2%.
If raw material price increases and a tight labor market continue for too much longer, this could affect margins as house prices can’t keep rising at the current pace.
Taylor Wimpey plans to increase the number of sales offices by 50 over the next couple of years so that it can accelerate its volume growth from 2023. This makes sense because home buying still requires that personal touch.
In the year to the end of June, it approved to sell a record 32,000 homes, achieving its medium-term operating margin target of 21% to 22%. Its return on capital employed was over 30%. Those approvals should result in completions of around 17,500 in the medium term, up from 14,000 in the last year.
This growth in completions means cash in the door, which boosts dividend cover. Taylor plans to return about 8.16 pence a share in dividends this year, giving it a dividend yield of 5.36% currently. With its net cash position, expected to be 700 million pounds at year-end, this seems comfortable.
Taylor is fairly valued according to the GF Value indicator. It has an attractive Altman Z-Score of 4.1, but a low Piotroski F-Score of just 2. So the numbers overall are not attractive enough for me to buy the stock despite the business’ solid forward sales, recovery in operating margins and decent dividend. It goes on my watchlist only, waiting for a better valuation and a pick up in the Piotroski F-Score.
