In short, 2019 saw a higher rise than expected in building volumes of 5%, but a lower than forecast 2% increase in prices of the houses it sold.
It was a “robust” trading statement, said broker Peel Hunt, encouraged by the resilient performance despite the uncertainty in the later months of the year.
With the balance sheet bulging with around £546mln of cash and circa £610mln due for payment to shareholders in the coming year, Peel Hunt noted that the 9.2% forecast dividend yield is the highest in the sector.
“On balance we think Taylor Wimpey currently offers the best value among the big three builders,” analyst Clyde Lewis said, keeping his ‘add’ rating and forecasts unchanged.
Completing a year with a sales rate at 0.96 sites per week, implies November and December continued earlier pace, which UBS said “is a very strong figure considering normal seasonality around Christmas”.
While this was partly offset by lower site levels in 2019, which dropped by 8% on average, UBS said the 22% growth in the order book to a record £2.2bn “points to 2020 revenue growth”.
Profit margins tighten
On the downside, operating margin declined to 19.6% from 21.6% last year, which was a lingering effects of the freehold scandal and renewed investment in build quality that the company was encouraged to make.
Profit growth expectations are in the low single-digit percentages for 2019 and the market expects similarly modest progress in 2020, which Russ Mould, investment director at AJ Bell says may explain why the shares are barely changed in early trading.
While interest rates remain low and government support is likely to continue as the UK is thought to still be well short of the houses it needs, this lack of supply is resulting in an affordability problem.
The price of the average house in the UK is just under £239,000, according to the Halifax price index, which is almost eight times the £30,000 median annual wage.
“That makes getting on to the housing ladder very, very hard and is likely to cap house prices from here, barring further government intervention,” said Russ Mould, investment director at AJ Bell.
“Such intervention is perfectly possible, either in the form of more tinkering with Help-to-Buy, which will only be available to first-time buyers of new-build houses from 2021 to 2023, or perhaps a cut in stamp duty land tax, an idea reportedly floated by Prime Minister Boris Johnson during the general election campaign.”
Government's budget eyed
As such, Taylor Wimpey, its housebuilding peers and investors will be keeping a close eye on what emerges from Chancellor Sajid Javid first budget in March.
Robin Hardy at Shore Capital examined the potential substantial changes to stamp duty land tax (SDLT) and an extension to or continuation of the home buyers’ affordability extender Help to Buy (HTB) in a note in December.
Noting that HTB costs the Treasury close to £3bn per year, he said an increase would be popular and there was plenty of history of the Tories altering HTB to give it extra life and wider scope.
With Boris Johnson reported to be looking at raising the starting point for SDLT liability from £125,000 to £500,000 this would exempt 89-90% of all transactions, leading to a loss of revenue for the Exchequer of around £6.5bn relative to last year, Hardy calculated.
“So, while lowering SDLT may trigger additional market activity it is unlikely to generate much additional revenue for the state and leave the reform expensive, perhaps too expensive when considered alongside potentially runaway costs in the closing months of HTB,” he said.
“Never say never when it comes to housing policy and intervention, but we believe the SDLT may remain just an ambition.”
The absence of further marked house price increases is likely to put some sort of lid on the sector’s ability to markedly increase earnings, says Mould, though he suggested this was unlikely to dim the attractions of the sector.
“In the absence of major profit growth, the builders will then trade off their dividend yields, which remain very generous thanks to their net cash piles and lofty profits.”