Taylor Wimpey and Ibstock batten down the hatches to trade through weaker housing market

The slowdown in the housing market was on clear display in results from housebuilder Taylor Wimpey (TW.)Follow | TW. and brickmaker Ibstock (IBST)Follow | IBST today. In both cases, the effects of rising mortgage rates on demand for new build housing has meant a significant sales slowdown, in Taylor Wimpey’s case a 21% hit and in Ibstock’s a slightly less painful 14%.

Markets, of course, are forward looking, so investors in both companies are more interested in what comes next than the rather unpleasant historic figures – and an improved outlook meant shares in both companies were up on the news. Ibstock said that demand had shown steady improvement over the half, chiming Taylor Wimpey’s observation that the Spring selling season had seen a recovery from the subdued final quarter of 2022, as mortgage rates pulled back slightly from last year’s highs. 

In both cases, that meant trading was slightly ahead of expectations and on track to deliver full year expectations. Taylor Wimpey, in fact, said that it now expected to deliver between 10,000 and 10,500 completions in 2023, at the upper end of its guidance. 

Profits are also expected to be in line with guidance, thanks to a firm pricing environment. Taylor Wimpey saw operating profit slip 44.5% to £235.6m in the first half, but a 6.7% in its average selling price to £320k means it’s still on course to deliver operating profits of between £440m and £470m this year. Ibstock also saw pre-tax profits slip 42%, to £30m, but that was largely the result of an £11m exceptional cost relating to a site closure, but firm pricing meant the board has stuck to full year forecasts.

Importantly, Taylor Wimpey ended the period with a marginally increased cash position of £655m, although that reflects a slowdown of land acquisitions, with the short-term landbank flat at 83k plots and the strategic land pipeline slightly lower at 140k plots. 

That cautious approach seems sensible given the possibility of more twists in the macro-economic backdrop, not least the broad impact of the effect of rising rates on those coming to the end of fixed-rate mortgage deals. A higher cancellation rate of 24%, up from the previous 19%, is a cause for some concern – and explains why Ibstock plans to reduce capacity by 40m clay bricks and investing to improve operational efficiency. 

And despite the government’s recent promise to deliver 1m new homes, the builder said that planning remains challenging – a good example of the often chasmic gulf between political rhetoric and the reality on the ground. 

But, more positively, build cost inflation is moderating, and the ongoing structural demand problems in the UK housing market mean a recovery will come at some point, especially with the government in damage limitation mode ahead of the general election and keen to push through populist policies. 

So, with the housebuilding and construction sector still looking cheap – Taylor Wimpey trades below book value, and Ibstock’s forecast PE ratio is just 11x – and companies battening down the hatches to survive a short-term market hiatus, investors with a long horizon and the stomach to ride out further economic bad news could pick up a few bargains.