Taylor Wimpey profit slumps but tide could be turning

Housebuilding is a cyclical industry which is currently near the low point of the cycle, which tends to lead to the survival of the fittest. Taylor Wimpey (LSE:TW.) remains in that camp.

The torrid backdrop of more recent times is well known, with higher interest rates, lower consumer confidence and general cost of living pressures all working against the industry.

High build cost inflation, a lengthy and laborious planning permission process and pressure on operating margins given some fixed costs are also providing headwinds, while the recently announced Competition and Markets Authority probe into issues including poor build quality and potential price collusion is an unwelcome development.

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As such, any number of the key metrics reflect a market which has weakened significantly. House completions for the year ended 31 December fell by 23% to 10,848, while revenue dropped by 20.5% to £3.5 billion and pre-tax profit plunged by 43% to £474 million.

Operating profit margin saw a significant decline from a previous 20.9% to 13.4% and the operating profit number of £470 million, while being at the top end of the company’s guided range, was nonetheless sharply down from over £900 million in the corresponding period.

Yet there are emerging signs of optimism which accompany these numbers. The revenue and pre-tax profit numbers were both ahead of expectations, and the balance sheet remains in strong health. Despite dropping from £864 million to £678 million, the net cash figure gives the company ample insurance in the environment and comfortably exceeds the previously guided range of £500 million to £650 million. The company’s strong cash generative ability has also meant that a progressive dividend policy can also be pursued, with a current yield of 6.8% providing a clear source of attraction for investors.

At the same time, Taylor Wimpey has maintained its more selective approach to buying land and has begun to drip its strategic landbank into play. It still retains a landbank of 80,000 plots, slightly down from a previous 83,000, underpinned by a strategic pipeline which leaves the door open for future developments as conditions improve.

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The group has also been focusing on cost reduction, while a tailing off of build cost inflation and an increase of 5.1% to £370,000 in private average selling prices have mitigated some of the challenges being suffered elsewhere.

The order book also remains at a healthy £1.95 billion, albeit slightly shy of a previous £2.1 billion, and in terms of outlook Taylor Wimpey has reported that in the year to date, private sales have risen from last year’s 0.62 per outlet to 0.67, which is a potential precursor of an improving outlook. The company is cautiously guiding for between 9,500 and 10,000 house completions in the coming year, with a roughly even split between the two halves.

A further note of caution on the outlook comes in the form of operating profit margin for the first half, where lower pricing, build cost inflation on works in progress and investment both in technology and its new timber frame facility, which is expected to drive efficiencies and increase the security of supply, all likely to weigh.

Even so, the tide could be turning and, while Taylor Wimpey is not calling for anything approaching a full recovery, there are some encouraging signs. The important Spring selling season is imminent, one which traditionally welcomes a spike of activity, while reducing mortgage rates given the likely interest rate cuts in the UK later this year should improve not only affordability but also consumer confidence more generally.

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All things considered, Taylor Wimpey has navigated the economic storm carefully so far, with the strength of its operations leaving it well placed to benefit from any incremental improvements in the immediate future. Unlike some of its competitors, this has been recognised in a share price which has risen by 14% over the last year, as compared to a dip of 2.5% for the wider FTSE100 index.

While the initial share price reaction is factoring in a lower level of revenue and profit in the absence of any sustained signs of recovery thus far, the market consensus of the shares as a 'buy' reflects not only that Taylor Wimpey is one of the preferred plays in the sector, but also that there is some embedded confidence in longer-term prospects.