Taylor Wimpey's prospects improving despite CMA probe

A dispassionate assessment of Taylor Wimpey’s (TW.) full-year figures would probably point to some early signs of improvement in the UK housing market set against a still challenging macroeconomic backdrop. Unfortunately, the statutory release came just days after the Competition and Markets Authority (CMA) said that it has launched a probe into the UK housebuilding sector after a year-long investigation.

The probe will centre on possible price collusion, specifically whether the main players in the UK market have been engaged in "information sharing", in a bid to influence “the build-out of sites and the prices of new homes”. Admittedly, the CMA investigation primarily laid the blame for the UK’s chronic shortfall in new housing on the current planning system. But for now, Taylor Wimpey is one of several housebuilders under the microscope, so any operational progress it makes in the near term will be set against the pall hanging over the industry.

Housebuilders saw market conditions improve through the early part of the year as lenders reduced mortgage rates thereby aiding affordability. Unfortunately, surging private sector wage growth is forcing a rethink on that front for lenders. Expectations of a cut in the UK base rate have also moved further into the distance. Nonetheless, the outlook has certainly become more positive and demand indicators point to a nascent recovery. Taylor Wimpey’s trading in the early part of 2024 supports this notion, although its reported figures show that it has been moving through a trough in the market. The group’s operating profit, at £470mn, was at the upper end of guidance, but it still represents a 49 per cent fall from the prior year, as the underlying margin contracted by 7.5 percentage points. The fall-away in profitability is perhaps even more disconcerting given that first-half margins are likely to be held in check by lower pricing in the order book and persistent build cost inflation.

Improved prospects are reflected in a net private sales rate of 0.67 per outlet in the early part of the year, against 0.62 over the equivalent period in 2023, while the cancellation rate has dropped 5 percentage points to 12 per cent. Despite these hopeful portents, the group indicated that it would build fewer homes this year, indicating lingering market uncertainty. Access to a sizeable land bank, some 80,000 plots, provides optionality in its determination to pursue “opportunities that balance risk, reward and returns to create shareholder value” – government diktat will have to take a back seat. A forward rating of 13 times consensus earnings (ex-cash) appears compelling given an implied dividend yield of 6.8 per cent, but it would be unwise to second-guess the outcome of the CMA probe. Hold.  

Last IC view: Buy, 118p, 02 Aug 2023