Taylor Wimpey [TW] expects to meet earnings expectations and post improved operating margins when it reports its full-year 2021 results announcement on 3 March.
When the UK housebuilding company released a trading update for 2021 on 17 January, the stock climbed 4.2% on the back of strong housing demand. While the company’s financial update provided a comprehensive look at last year’s performance, investment director Russ Mould and financial analyst Danni Hewson, both of AJ Bell, believe the upcoming full-year results will still be “notable” for other reasons.
According to the analysts, it will be the last set of financial results to be released during Pete Redfern’s tenure as chief executive. Redfern, who has held the position since 2006, will be succeeded by Jennie Daly in April, Mould and Hewson said in pre-earnings commentary seen by Portfolio Advisor.
Robust demand and rising house prices
The company’s full-year results are expected to reflect the company’s strong backdrop in 2021. In its January update, Taylor Wimpey reported that it experienced strong demand for its houses, underpinned by supportive market conditions, including continued low UK interest rates and good mortgage availability.
House prices have been rising and show no signs of abating based on the company’s figures. Taylor Wimpey posted that the average selling price on private completions increased by 3% year-on-year to £332,000, with the total number of UK home completions rising by 47% to 14,087.
The company’s Spanish business has also started to show signs of improvement, with 324 homes on the order book compared to 126 in the year-ago period, following the gradual easing of travel restrictions due to Covid-19.
Can a strong balance sheet offset rising inflation?
In Taylor Wimpey’s most recent update, management said that house price inflation was still offsetting building costs amid wider industry pressure on the cost and availability of certain materials.
However, with inflation rising, Hargreaves Lansdown equity analyst Matt Britzman believes it could present a headwind. “There should be operating profits of £820m, with margins of 21–22%. Those margins will be watched closely, as will any further updates on margin outlook as cost inflation and supply chain pressures have been a persistent headwind,” he told Portfolio Advisor.
The Bank of England has raised interest rates twice since early December, having cut interest rates to an all-time low of 0.1% at the start of the Covid-19 pandemic in March 2020. At the beginning of February, the official rate was increased to 0.5%, with analysts forecasting a potential two additional hikes this year, which could weigh on housing demand.
As it stands, the company’s balance sheet is in good shape to weather a downturn in lending. Taylor Wimpey highlighted earlier this year that it has a strong net cash position of £837m. Management also hinted that it plans to return excess cash to investors through a share buyback.
Analysts look to Taylor Wimpey’s sales outlook
Despite the positive outlook, shares in the housebuilder have been trending lower ahead of its earnings announcement, reaching a 52-week low of 140.90p during intraday trading on 24 February. The stock price has fallen 20.7% year-to-date to 141.25p at the close on 1 March.
Taylor Wimpey is also facing other headwinds, including the UK government’s decision that construction firms should contribute to a cladding fund to address issues with unsafe building materials following the Grenfell Tower fire in 2017.
“Updates on forward sales should give an indication of where demand is for 2022. That’ll be timely information given the government's most recent data suggested house sales in January cooled off,” Britzman said.
An overlooked FTSE 100 stock?
Despite potential headwinds, Taylor Wimpey has an encouraging order book for the year. This has been helped by the end of the stamp duty holiday, along with the government’s new Help to Buy scheme. Its order book is 47% forward sold for 2022, down slightly from 54% a year ago.
In its latest research note in February, investment bank Berenberg singled out Taylor Wimpey, which the firm added to its top picks list last November when it replaced rival Bellway.
Despite the cladding remediation costs adding pressure to housebuilders, analysts at Berenberg said: “We still think Taylor Wimpey offers a compelling total return over the medium term that is not reflected in the price.”
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