Busy property market lifts margins at Taylor Wimpey

Taylor Wimpey (TW) benefited from an exceptionally busy year in 2021 as buyers raced to take advantage of government support measures, notably the stamp duty holiday, while they lasted. The housebuilder announced £150mn of share buybacks in 2022, after home completions jumped by 47 per cent and selling prices rose by 4 per cent to £300,000, helping to push profits up even as labour and materials costs spiralled. 

“Assuming the market remains broadly stable, we continue to expect to deliver low single-digit year-on-year completions growth in 2022 and to make further progress towards our 21-22 per cent operating margin target,” said the construction firm, which managed to grow operating margins from 10.8 per cent to 19.3 per cent in 2021.

Some of Taylor Wimpey’s tailwinds, including near historically-low interest rates, cheap mortgages and record-high house prices, appear to have rolled over into 2022, with more than 60 per cent of the order book for private completions forward-sold by the end of February. 

The next few years are likely to prove more challenging. Almost a fifth of Taylor Wimpey’s buyers in 2021 used the Help To Buy scheme, and with the scheme’s end pencilled in for March next year, this could have a big impact on demand. At the same time, anticipated interest rate rises would have a knock-on-effect on mortgages, reducing their availability and making payments more expensive.

The construction company has responded by upping its weighting of three-bedroom homes compared with larger homes on its plots, but nevertheless said it expects the affordability of mortgages to “remain good”, especially when compared with the cost of renting. 

But if slowing demand does push down house prices, then build cost inflation, which is currently running at around 6 per cent, will pose a greater threat to profit margins. On top of this, the government is making plans for a levy on housebuilders to fix unsafe cladding on old buildings, for which Taylor Wimpey has already set aside £125mn. 

Taylor Wimpey trades on a forward PE ratio of 7.7 times, lower than its closest industry peer Persimmon (PSN), which trades at 9.3 tiimes. Andy Murphy, analyst at Edison Group, said that this rating difference reflects its lower return on capital vs its peer.

Chief executive Pete Redfern, who has been at the helm for 15 years, is slated to step down at the end of April, when the group’s current operations director Jennie Daly will take over. The unenviable array of housing headwinds she inherits lead us to keep the stock on hold for now.

Last IC View: Hold, 171p, 4 Aug 2021