Taylor Wimpey's balance sheet holds hidden value

Some investors know a good deal when they see one. On the morning Taylor Wimpey (TW.) posted better-than-expected results for the six months to 2 July, its share price climbed 3 per cent.

However, we feel that the equity market as a whole is still undervaluing this listed housebuilder. On a price-to-earnings ratio and dividend yield basis, Taylor Wimpey is cheap even compared with its cut-price peers in the housebuilding sector.

There’s some logic to this line of thinking. The housing market is in a slump right now. So, while Taylor Wimpey performed better than it or analysts had anticipated, it still posted a drop in revenue and profits.

Such thinking ignores the potential upside for the company when the market for housing returns to life, which it inevitably will because the government is keen to drive more home building, and plenty of Britons are still struggling to buy one. The long-term industry drivers remain intact.

Taylor Wimpey stands out as better placed to recover than many of its rivals, in part because it recorded no additional post-Grenfell cladding costs this year, but also because of its large landbank and cash reserves. While other housebuilders are depleting their coffers as revenues dry up, Taylor Wimpey has enough dry powder to ride out this downturn. Good news, too, for those who invest for income as its dividends depend on these assets rather than earnings.

And this underscores the final bull point for Taylor Wimpey: it is priced lower than its net assets, the bulk of which is that landbank. The equity market fails to appreciate the value of it. But we do. Buy.

Last IC view: Buy, 116p, 27 Jul 2023