Investors are punishing Taylor Wimpey. The housebuilder’s shares have underperformed all UK-listed peers since March, despite it raising guidance for completion volumes this year and posting an operating margin superior to most rivals at the half year.
The reason for investors’ ire? An overzealous £515 million capital raise last June. The housebuilder had banked on being able to snap up land at bargain prices amid the uncertain trading backdrop. That cash has been deployed, but the raise was deemed too large by some. As Colin Sheridan, an analyst at Davy’s, points out, “the perception in some investors’ minds was that money didn’t really have to be raised”.
As with its peers, the recovery in the FTSE 100 constituent’s profits has been turbo-charged by the stamp duty break. Far from the doomsday scenario feared by some in the immediate aftermath of lockdown, demand has snapped back and fuelled record sales price growth.
Analysts have forecast revenue of £4.2 billion this year and pre-tax profits of £724 million, rising above the pre-pandemic level next year. This rebound looks assured. At the start of August, Taylor Wimpey had forward sold 99 per cent of the plots due for completion this year, better than the pre-pandemic figure.
The question for housebuilders is how much the end of the stamp duty break at the end of September hits demand. Low interest rates and the return of mortgages at higher loan-to-value ratios are positives.
But there’s also inflation. In the first half, house price growth offset rises in building material and wage costs, providing a 2.2 percentage point benefit to the operating margin, versus a 1.7 percentage point drag from cost inflation. But this might not continue to be the case.
House price growth remains elevated but the pace of that growth is showing signs of abating. If rises in raw material prices and a tight supply of labour linger longer than expected, that could affect margins.
The boost from government stimulus has also obfuscated the impact of the restriction of the help-to-buy scheme to first-time buyers and the introduction of regional price caps. During the first half of the year about 27 per cent of private reservations used the scheme, down from 53 per cent last year.
The Competition and Markets Authority investigation into the sale of leasehold homes and potential breaches of consumer protection also places a shadow over the shares.
But if Taylor Wimpey can hit volume growth targets it might win investors’ forgiveness. It plans to increase the number of sales outlets by 50 over the next two years, in the hope of accelerating the rate of sales volume growth from 2023.
In the 12 months to the end of June, it approved a record 32,000 plots in line with its medium-term operating margin target of about 21 per cent to 22 per cent and at a return on capital employed of over 30 per cent. Those approvals should result in completions of between 17,000 and 18,000 in the medium term, from 14,000 this year.
Stepping up the completion rate would bode well for dividends, too. It plans to return about 7.5 per cent of net assets to shareholders annually in two equal payments. This year, analysts forecast that it will amount to 8.16p a share, a potential dividend yield of 5.3 per cent at the current share price. And the net cash position, expected to sit at £700 million at year end, is robust.
Based on its forward price/book multiple of 1.3, investors are pricing Taylor Wimpey’s prospects only slightly less pessimistically than in the immediate aftermath of the Brexit referendum. There’s plenty of room to surpass that low bar.
ADVICE Buy
WHYShare valuation looks too pessimistic against solid forward sales, recovery in the operating margin and generous dividend
Temple Bar Investment Trust
There’s an element of luck to investing in equity markets. Value investors’ big break came last year when the vaccine breakthrough precipitated a rapid upswing in beaten up stocks.
For Temple Bar Investment Trust, which backs companies it thinks are undervalued and have recovery potential, the result was a total net asset value (NAV) return of 19 per cent, almost double that of its benchmark, the FTSE All-Share.
A change in the portfolio management last year didn’t precipitate a switch from the value focus, despite a bruising 12 months, when the trust’s NAV declined by almost a third. In fact, it saw last spring’s tumultuous markets as an opportunity to gain greater exposure to companies with distressed valuations.
Backing Temple Bar requires a bigger dose of faith than investing in UK equity trusts that target companies with steadier earnings. Performance has been patchy — value stocks were out of favour even before the pandemic, after all.
It has high weightings to some volatile — and contentious — companies, including Royal Mail, BP and ITV. At the end of August, the investment trust underperformed the benchmark on a three-year basis, generating a negative net asset value and share price total return of 2.1 per cent and 3.5 per cent respectively, versus 11.4 per cent for the FTSE All-Share.
A focus on highly cyclical companies meant that the trust also bore the brunt of dividend cuts. In turn, it wielded the axe over its payment, which was reduced to 38.5p a share, from 51.4p in 2019, the first cut in 36 years. This year’s payment is forecast to be at least 39p, with a greater proportion paid out from underlying dividend income — 31p — and less from revenue reserves. At the current share price of £10.54, that would still equate to a decent potential dividend yield of 3.7 per cent.
Share buybacks are planned to help close the gap between the trust’s NAV and share price. Based on the trust’s NAV at the end of August, that discount amounted to almost 10 per cent versus the share price. That caution seems apt.
ADVICE Hold
WHYDecent dividend yield but the volatile performance warrants a discount
