Taylor Wimpey: Homebuyer Interest Recovering From Late 2022 Nadir; Shares Significantly Undervalued

Taylor Wimpey’s TW. April 2023 trading update confirmed for investors that while U.K. homebuyer confidence remains shaky, it is gradually improving in 2023. Taylor Wimpey’s year-to-date weekly private sales rate of 0.66 homes per sales outlet, excluding nonrecurring bulk sales, suggests that current homebuyer interest has improved since early 2023 and represents a marked increase of 38% relative to the second half of 2022—when forward orders crashed as U.K. mortgage interest rates spiked. Our long-term expectations for the no-moat homebuilder remain unchanged as does our GBX 190 fair value estimate. We think investors are too narrowly focused on the glum housing market conditions that currently prevail. Consequently, Taylor Wimpey shares continue to screen as materially undervalued and trade at a 34% discount to our unchanged fair value estimate.

The ongoing improvement in home sales rates disclosed by Taylor Wimpey—and its peer Persimmon in recent days—has been reassuring for investors, driving U.K. homebuilder stock prices higher. Still, interest from homebuyers remains at a cyclically depressed level, rendering Taylor Wimpey’s full-year 2023 outlook challenging. Taylor Wimpey has retained its subdued 2023 volume guidance range of 9,000-10,500 homes, implying expectations of little to no improvement in the sales rate throughout the remainder of 2023.

We continue to expect 2023 home completions near the top of Taylor Wimpey’s guided range, representing a sizable 25% contraction in volumes year on year. Nonetheless, we lift our full-year EBIT and EPS forecasts by 27% to GBP 458 million and GBP 0.09, respectively, with signs that build cost inflation is beginning to ease from recently searing levels of 8%-9%. Stronger pricing in Taylor Wimpey’s forward order book than we’d previously credited also contributes to the meaningful upgrade to our 2023 financial estimates.