The low-interest rates and the government’s support for home buyers have renewed interest in this sector. According to the Halifax Home Price index for May, British house prices were 9.5% higher than a year earlier. Here, I would like to review whether to add Taylor Wimpey‘s (LSE: TW) shares to my portfolio.
Taylor Wimpey company’s fundamentals
Taylor Wimpey’s revenue grew at a CAGR (compound annual growth rate) of 5.7% from 2016 to 2019. The growth rate is not bad as competitor Barratt Developments’ revenue grew at a CAGR of 4.0% during the same period. I have excluded the data from 2020 since there were disruptions due to Covid-19. For the year 2020, revenue fell by 36% to £2.8bn. The drop is not bad, in my opinion, in what seems to be a challenging year.
In the most recent trading update, the Chief Executive, Pete Redfern, sounded very confident. In his own words, “The UK housing market continues to be resilient and we are trading in line with our full-year expectations. With strong market fundamentals, customer demand for our high-quality homes remains robust and we are achieving a strong sales rate and building a healthy forward order book”. Looking into the company figures, it has a good order book of £2.8bn compared to £2.7bn during the same period last year.
Taylor Wimpey has a good land bank. It used the opportunity to buy the land at lower prices during the Covid-19 pandemic last year. It had raised a capital of about £500m last year for this purpose. The management also participated in the equity offering, which is a positive sign.
The UK government has been supportive of the housebuilding sector. The various schemes like the stamp duty holiday, Help to Buy, and 95% mortgage guarantee scheme are positive for the sector and Taylor Wimpey’s shares. The low interest rates will also improve affordability for home buyers.
Risks to consider in investing in Taylor Wimpey shares
The management expects to deliver 85%-90% of 2019 volumes, which is positive. However, some risks could dampen the growth. The new Covid-19 variants are spreading in the UK. If the cases do not come down in the coming months, then full opening of the sectors could be delayed. This will hurt the housing sector.
If the house prices fall due to the slowing economic growth then this could reduce the company’s profits and cash flows. The company has invested huge money in land buying and building houses. The return on investment might fail to meet expectations.
Taylor Wimpey shares are currently trading at a price-to-earnings (P/E) ratio of 27.05 compared to the five-year average of 10.74. The forward P/E is 9.9. So, I believe the upside is not much at the current prices.
Final view
The macro-environment for home builders is improving. The company’s fundamentals are also good. However, I would like to keep the stock on the watch list for now as I believe that Taylor Wimpey shares are not a bargain buy.
