Taylor Wimpey Earnings: Build Cost Inflation Headed in the Right Direction; Shares Cheap

Taylor Wimpey’s TW. performance in the first half of 2023 provided us with few surprises, with the no-moat homebuilder delivering 5,120 home completions, EBIT of GBP 236 million, and is broadly tracking our full-year expectations. Investors were nonetheless pleased by the result—sending shares 4% higher—likely reassured by Taylor Wimpey’s modestly upgraded volume guidance and a resilient year-to-date average selling price amid challenging housing market conditions. Taylor Wimpey expects to deliver full-year home completions toward the upper end 10,000–10,500 in 2023—tracking our full-year expectations and upgraded from a prior guidance range of 9,000–10,500 homes. Confirmation that build cost inflation is beginning to ease from its heightened level of early 2023 was likely of further comfort to investors. Our full-year 2023 expectations remain broadly unchanged. Still, we tweak our full-year EBIT forecast lower by 4% to GBP 451 million with land cost recoveries shaping up to be less favourable than we’d previously credited.

Taylor Wimpey’s 2023 outlook is incrementally more positive than it was a few months ago. Still, investors remain acutely focused on the downbeat U.K. housing market which remains in the throws of a cyclical downturn. With investors still placing too much weight on near-term cyclical woes—while disregarding the robust long-term fundamentals for Taylor Wimpey and its major U.K. homebuilder peers—Taylor Wimpey shares screen as significantly undervalued, trading at a steep almost 40% discount to our GBX 190 fair value estimate.

Importantly, build cost inflation, while still elevated, has begun to trend favourably for Taylor Wimpey. Annualised build cost inflation has eased to 6% in mid-2023, down significantly from the 9%-10% build cost inflation experienced in early 2023. A slowing of the rate of increase of building material and labour prices have jointly contributed to an improved outlook for cost pressure throughout the remainder of 2023.