taylor-wimpey

Shares Outstanding 3.57BnStock Price £1.2Mkt Cap £4.3BnCash £921MnEV £3.4BnInsider ownership - negligible BACKROUND 1. Company description.Taylor Wimpey ‘TW’Taylor Wimpey is one of the large publicly listed home developers. The current valuation of publicly listed UK home builders seems unusually cheap. The companies that I have perused are generating high returns on capital and are returning excess cash to shareholders via dividends.TW has two divisional units in the UK & Spain respectively. Spain is less than 2% of the groups total revenue and is ignored in this summary.5400 employees - 19% employee turnover – seems standard within this industryLandbank currently stands at c.6.1 years - ‘Our landbank years metric continues to run ahead of our target as we continue to process land bought as a result of our equity raise in June 2020, when we saw a short term opportunity in the land market to invest for the long term’Management is focused on improving operating margins to be in the region of 21-22% from the current FY21 19% margins. Interestingly they make no mention of ROCE targets, whereas their competitor Barratt homes have stated a target of 25%, though Barratts margins are lower than TWThere has long been and continues to be a housing shortage here in the UK. The Government would like to see 300,000 new builds per year and the current total completions for 2021 were c.220,000. Housing completions has seen a steady uptick (except for covid 2020) Management intends to increase completions to 20,000 in the medium-term management. I believe these figures to be achievable. They have the land bank and cash according to the best investing websites (http://www.columbia.edu/~tmd2142/6-best-investing-websites.html) Total home completions in year 2018 – 14,822· Total home completions in year 2019 – 15,520· Total home completions in year 2020 – 9,799· T otal home completions in year 2021 – 14,302 Total deliveries are have been stable, though the intention for medium-term is to increase total builds to 17,000-18,000 homesThe developer’s business model:1. Purchase land2. Draw up plans, obtain planning permission3. Build it4. SellPhase 1, translates into tying up capital for longer periods of time until the developer reaches the final phase and sell the home. Barratt forward buys – meaning they agree with landowners that they will complete but only when they are ready to build after receiving planning consent. This helps free up major capital resources.TW says that their average forward land cost per home stands at 14.6%.At the height of the pandemic in 2020 TW raised £500M from a position of ‘strength’ to take advantage and purchase land at a time when competitors were concerned of what the future held. This was a great move, which gives TW great visibility into the future and most likely lowers future land costs.The margins are expected to come from the restricting efficiencies and cost Financials:Balance sheet: (Dec 21)Relatively few components to the assets. Essentially, cash, inventory and land· Cash £921M· Land bank and WIP - £4.94Bn & JV of £77Mn· Total tangible asset is c.£5.9BnI ignore all intangibles for now. Liability:The largest is trade payable, which consist of land bank purchases and liability to finish the works of houses already soldThe current landbank size is 4-4.5 years, tying up a substantial amount of capital. Management have just initiated a share repurchase program of £150M to be completed before end of July 2022. This is a positive development given that TW has essentially been returning shareholders Capital predominantly via dividends. I believe at current prices a solid share buyback plan in addition to the ord dividend will be advantageous for future returns.The current dividend policy is paying out to shareholders approximately 7.5% of net assets each year. More details can be found in these forms: Apple 10KTesla 10KNetflix 10KMicrosoft 10KAmazon 10KGoogle 10KApple 10QTesla 10QNetflix 10QMicrosoft 10QAmazon 10QGoogle 10QCompany Outlook:LandBank is in great shape, strategically purchasing plots with a historical ROCE of c.34% and operating margins intended to be in the region of 21-21% as per management’s guidance.Assuming the market remains broadly stable, we continue to expect to deliver low single-digit year-on-year completions growth in 2022 and to make further progress towards our 21-22% operating margin target. We expect 2022 year-end net cash to be around £600 million, depending on the timing of land payments. Build cost inflation is currently running at c.6% and, at this stage, we expect sales price growth to continue to offset build cost inflation in 2022 Insider Ownership:Personally, I tend to invest in companies where Management has a fair amount of skin in the game, and this management team hold less than 1% of the outstanding shares. Inversely the bonuses are aligned somewhat to shareholders interests. The CEO’s pay package is on the lower end compared to Barratt homesValuation: at Dec 21The current market cap is a little over £4.3Bn (£4,350,000,000)· NAV calculated as tangible assets (ex goodwill) is £3.94Bn = 1.1 Book value· P/E ratio calculate at 6.55X (Mkt Cap £4.3Bn / Same profit as FY2021 NPAT £656M· P/FCF at c.9X (assuming movement in inventory by year-end) Concerns to think about:1. The most recent earnings release/outlook was early 26 April 2022. Still intend to achieve the FY2022 guidance given2. Interest rates are on the rise. By how much & how fast is anyone’s guess. (still affordable),3. Corporate tax rates are increasing in steps over the next 3 years which will impact free cash flow, and in addition, a new 4% tax on new build homes is near certain to come into effect this year. I’m sure this cost will be forwarded onto the purchasers….Inversely, there is a housing shortage. Every property investor that I have spoken to, says the same. Demand is just overwhelmingly strong (I admit we are talking about new builds and all investors refer to old stock, which is cheaper to purchase compared to new builds)Looking back at the GFC, the housing market was hit BADLY, the commentary there was, prices have fallen, sales have fallen, we wrote down inventory on land and houses, but until Mortgage availability improves, there will be no recovery. Banks are not shying away from lending cash, lessons were learnt by being so eager to lend at any cost and at any loan-to-value. Competition:Taylor Wimpey – built 14,000+ houses in 2021, they have a solid balance sheet like Barratts, margins were better than Barratts at 19.3%, the capital returns program is better suited to shareholder returns.