Taylor Wimpey builds up its land bank

The exceptionally hot housing market, driven by the stamp duty holiday, has shot Taylor Wimpey (TW.) to a strong set of half year results. Its revenue, operating profit, margin and completion numbers were way up on 2020, when Covid-19 impacted the business significantly. It has used this momentum to complete lots of land acquisitions, which is promising for its medium-term prospects. However, there are some grey clouds on the horizon in the shape of raw material inflation and a potential housing price bubble.

Total completions jumped to 7,219 in the first half of the year, which is 10 per cent higher than during the same period in 2019. The average selling price increased by 11.2 per cent to £299k, resulted in a 19.3 per cent operating margin, 130 basis points higher than the 2019 figure. In the medium-term, the company is aiming for a margin between 21 per cent and 22 per cent. But the fact that some metrics are up on the pre-pandemic comparators doesn't necessarily indicate that underlying market fundamentals have improved.

Nevertheless, the company can set itself bullish targets because it has taken “timely advantage of the lack of competition in the land market last year”. In the past year, it approved a record 32k plots, which is around double the number of plots that are sourced and approved in a normal year. “Assuming normal market conditions” this additional land will enable it to deliver 17,000-18,000 new houses in the medium term.

These are promising forward estimates but what “normal market conditions” are in the UK housing market isn’t that obvious. On the morning of the results, chief executive Pete Redfern told the BBC Radio 4's Today Programme that it was an “entirely healthy and stable housing market” and that none of the conditions that caused the 2007 bubble are true today. If this prediction is eventually proven to be false then the 21-22 per cent operating margin target might be overly ambitious. 

Following a 3 per cent rise, the housebuilder is trading at 1.5 times book value. AJ Bell said that the company's “shares are cheap if they trade at one times book value” and are “expensive if they trade at two times”. In their view, the current value leaves some “scope for appreciation”.

The current valuation isn’t overly expensive but there are signs that the market could be stalling, while raw material inflation is another potential concern. Hold.

Last IC View: Hold, 171p, 2 March 2021