Taylor Wimpey PLC (LON:TW.) shares crumbled on Thursday after the housebuilder warned it is struggling to keep a lid on build costs.
The FTSE 100 group, which built almost 15,000 houses last year, had originally expected the cost of things such as materials and labour to rise by between 3-4% in 2019.
But it has told investors that build cost inflation has been “higher than expected” in the opening few months of the year, forcing it to up its estimate to 5%.
READ: Taylor Wimpey off to positive start in 2019
“This is driven by a combination of underlying cumulative inflation and exchange rates impact on the cost base of suppliers, and a higher than expected demand in the short term from defensive additional buffer stock holding in the construction industry supply chain,” read a statement.
Shares dropped almost 5% in early deals to 183.7p.
Bosses kept their full-year profit guidance in place, though, with better than expected sales offsetting the squeeze on margins.
Sales rates for the year to date were 1.03 per outlet per week – better than the 0.85 it registered a year earlier and above where the company had forecast them to be. At £2.4bn, the order book is also “strong”.
Taylor Wimpey said cheap mortgages and high employment levels meant demand for its houses has remained “robust” despite the current economic and political uncertainty.
Record sales offsetting margin squeeze
“We've made a good start to 2019 and in spite of wider macroeconomic uncertainty, the housing market has remained stable,” sad chief executive Pete Redfearn.
“We are achieving a record sales rate and building a solid forward order book for the year, although we see increased build cost pressures.”
He added: “We remain on track to meet our overall expectations for the year but expect results to be weighted towards the second half.
“Given the strong sales performance, we expect full year volumes to be slightly higher than 2018 but given the greater build cost inflation for the year, we expect margins to be slightly lower.”
‘Better value elsewhere,’ says City broker
“Overall we see limited changes to our forecasts for FY19 but do expect to make some tweaks to our mix,” said Peel Hunt in a note to clients.
“In short the sales rate has remained a bit stronger than we are forecasting so we need to add c2-3% to our full year volumes but this will be offset by a bigger margin drop.
“This drop is being caused by increased build cost pressures driven mostly by higher materials prices in part linked to some Brexit one-offs.”
The City broker, which has a target price for the stock of 165p, concluded: “The shares have had a strong run in 2019 rising by 41%, comfortably ahead of the 25% sector bounce.
“We leave our ‘hold’ recommendation in place and see better value elsewhere in the sector for now.”
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