Taylor Wimpey: Bucking the Trend?
When contrasted with the punishing experience many Industrials have endured during the pandemic, Taylor Wimpey’s projected lift in 2020 operating margins is all the more impressive: the FTSE 100 company is confident of delivering 2020 results “towards the upper end of market expectations” and in exceeding them in 2021.
The UK housing market has remained buoyant following the Q2 2020 lockdown; Nationwide reports UK house price growth climbed to 7.3% at the end of 2020 - the highest growth rate for 6 years - with the average property now valued at £230,920.
This strength is likely a function of the short-term extension of the Government’s Help to Buy scheme and Stamp Duty Land Tax holiday. Indeed, Robert Gardner, Nationwide’s Chief Economist, remarks that whilst rising unemployment is an obvious threat to property values, demand will continue to be derived from people adapting to structural changes such as remote working practices. When combined with the anticipated continuation of an ultra-low interest rate climate, this resilient housing demand is testament to a very supportive lending backdrop alongside structural drivers induced by Covid-19.
On the supply side, the operating backdrop, whilst precarious during the two lockdown periods, has returned to near-normal levels; Taylor Wimpey anticipate completions for 2021 will be at 85-90% of 2019 levels. Indeed, an equity raise of c.£500m in June has permitted an aggressive strategy in the land market. The Group has sought to take advantage of falling land prices, spending c.£826m purchasing 70 sites and 14,500 plots since the end of the second quarter. This is significantly higher than its normal rate of acquisition, over twice the average annual rate in recent years. These sites will enable an acceleration of volume growth beyond 2023 and have been secured at prices consistent with a targeted return to an operating margin of 21-22%.
As such, the share price recovery towards pre-pandemic levels is unsurprising. Whilst many Industrials have floundered and tapped investors to shore up balance sheets, Taylor Wimpey has exploited its capital raise to purchase assets generating an average return on capital employed of 34%. Given resilient housing demand and a growing landbank sourced for attractive returns, the firm expects to “deliver 2021 operating profit materially above the top end of the current consensus range”.