A bit of a gamble?

Thursday, Dec 18 2008 by
5

I bought into Taylor Wimpey Plc (LON:TW.) recently. That was despite current market sentiment which I feel has been overdone. TW has far greater assets than current debt. Debt is about £2bn and assets about £4bn. Okay so assets are falling and lets take a worse case in the next year of 25% we still end up with about £1bn assets for a company with a mkt cap of £100m currently.

Okay so the current panic is meeting banking covenents in the near term. This saw AXA sell off a huge position and force the price down to 4p silly really but they panicked. Barratts pulled off a refinancing and I see no reason why TW. should not do so. I took advantage of the sell off to buy it was a 25% gamble but worth having a go at. Yesterdays news of a leaked email confirming that all was not lost and negotiations were going well saw the price rise 7%.

I feel this could be a 5 bagger in the short term and perhaps a ten bagger in a year? But who knows.

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Taylor Wimpey plc is a residential developer. The Company operates at a local level from 24 regional businesses across the United Kingdom, and it has operations in Spain. Its segments include Housing United Kingdom and Housing Spain. The Housing United Kingdom segment includes North, Central and South West, and London and South East (including Central London) divisions. The North division covers its East and West Scotland, North East, North Yorkshire, Yorkshire, North West, Manchester, North Midlands, Midlands and West Midlands regional businesses. The Central and South West Division covers its East Midlands, South Midlands, East Anglia, Oxfordshire, South Wales, Bristol, Southern Counties and Exeter regional businesses. The London and South East Division includes Central London and covers its East London, North Thames, South East, South Thames and West London regional businesses. It builds homes in various locations of Costa Blanca, Costa del Sol and the island of Mallorca. more »

LSE Price
164.3p
Change
4.6%
Mkt Cap (£m)
5,389
P/E (fwd)
8.1
Yield (fwd)
11.2



  Is LON:TW. fundamentally strong or weak? Find out More »


29 Posts on this Thread show/hide all

CityTrader 27th Dec '08 10 of 29
1

I have no real idea about the long term survial of TW or perhaps many companies currently out there. Far too many have debt that far exceeds assets. When Persimmon announced it was halting building I thought well what is the point of Persimmon if it isn't building?
We do though still need houses to be built. Demographics are clear in this. Perhaps there will be more support here next year who knows? I don't.
The reason I bought was because the assets here far outweigh the debt. and the mkt cap. Even if houses fall 15% this year assets will still be far in excess of both parameters.
The debt is obviously the first point which needs to be solved. The extension to the covenant was the most vital issue before Christmas and now the issue is debt negotiation. Once that is done then I expect the market to revalue TY on the assets or the price of assets in 12 months etc. At this point I expect to see improved clarity on future trading conditions and then at that point I shall decide if TW will be a good long term investment or to sell up and bank my profits. I hope it will be at about 50-100p but who knows?

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CityTrader 2nd Jan '09 11 of 29
1

http://www.independent.co.uk/news/business/sharewatch/share-tips-lets-be-daring-this-year-after-all-how-much-worse-can-it-get-1221120.html

Our second big punt is Taylor Wimpey, another illustrious member of the 90 per cent club. This stock has managed to be the worst of the housebuilders, which is no mean feat given the pounding the sector has taken. However it could pay off handsomely if the troubled housebuilder can work out a deal with its lenders in February. The banks are unlikely to play hardball as they don't want to load their already battered balance sheets with housing assets. Some sort of limited debt for equity swap is the most likely scenario and, although probably dilutive, the likely net asset value in most swap scenarios is, according to the broker KBC, "well above the current price".

This is our second use of the warning siren, but a successful renegotiation could offer investors a substantial

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Murakami 4th Jan '09 12 of 29

Good shout, CityTrader - I have had a good look and I buy the investment thesis. Should be a humdinger. Got any more tips like this one?

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CityTrader 10th Jan '09 13 of 29

In todays FT - Taylor Wimpey agrees debt terms

By Anousha Sakoui and John O'Doherty. Published: January 10 2009 02:00

Taylor Wimpey has informally agreed key terms with its banks and other senior creditors for a restructuring of its finances, allowing it to move forward with negotiations with its bondholders. The housebuilder and its leading senior lenders have agreed informally to a deal where the senior debt maturities are extended to 2012 from dates over the next three years. Lenders would be compensated by having the interest on the loans increased to more than 500 basis points over Libor, a near 10-fold increase on the Libor margin Taylor Wimpey used to pay. However, there is still significant work to be done with some elements of the new arrangements. The bankshave yet to secure the approval of their credit committees, according to people familiar with the process. Taylor Wimpey lenders agreed on Christmas Eve to defer covenant testing until March while it negotiates new financing terms.

Exactly the news we have been waiting for. Hopefully 50p next week though it may overshoot so may sell and buy back if it does.

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CityTrader 12th Jan '09 14 of 29

Future potential?

Just to back up my recent writings and possibly put in perspective all that is going on with TW at present.

Fistly there was the fall from 500p to 4.5p. Lots of fear here. Just about everyone ran for the exit most of all AXA who sold this one down from 10p to 4.5p. If not for AXA I believe we would have stayed around 10p.

Assets as of June 2008 £4bn
Loans £1.9bn
TOTAL ASSETS WITHOUT DEBT  £2.1bn
Cueent Mkt cap £226.4m
Just over 1bn shares in issue. Roughly mkt cap rises by £10m per 1p rise in share price.

Normally the mkt cap should be about equal to the assets £2.1bn would be a share price of 200p. Add to that the goodwill/trade/profits etc. However as we all know the assets value is falling almost daily. To allow for this I shall reduce assets by 25% Which should allow for the year from last Jun to Jun 2009. It could be more it could be less so I am trying to take a middle view here.

If assets reduced by 25% = £1bn Then share Price reduced to 100p on assets alone. Current SP 21p

Personally I've been surprised that a Venture Capital company has not come along and snapped up TW on the cheap because the assets far outweigh any debt here.

The fear has been due mostly to breaching of banking covenants and now the fear has been not achieving agreements with the banks. Also there was fear of a debt for equity swap wiping out shareholders These  were the main reason for the fall. Current trading did play a part for a fall to 100p but not for any fall below that really except perhaps for future fall in value of assets.

News that the banks had extended the deadline saw the SP begin to rise above trend. Then we had the tax rebate news £90m coming our way worth 9p a share. Over the weekend we have the news that agreement has been reached with the banks just needs to be officially signed off.

ON this news the SP should rise to around 100p given the asset value. However SP's never do as planned so I think it may hit 80p or if it rises to 100p it may overshoot to say 110p.

The next issue is going to be how trade is how large losses will be etc. If the market believes that the worst is going to be this year but next year will see recovery then we should be looking for the future in 18 months time. Stability will be important here. So I'm going to stick my neck out here and say that it may stabilise in a years time. If the market thinks this then 100p should be sustainable.

Lots of variables in the mix here which can alter everything. Management may manage to sell assets close to book value and pay off debt quicker which will help or they may achieve low prices but within my calculations. Maybe some less than my valuation. So news this year on asset disposals or any losses will make a big difference to the SP.

For now though TW is one of the biggest bargains on the market. The debt is important as an issue but the assets are really what matter here. If they were about equal to the debt then you could justify 4p etc but that's not the case. Assets far outweigh the debt and the SP.

More factors in our favour are shorters. Currently we believe that 12% of shares are on loan for shorting. At some point they will have to buy back into the market to close out. That point surely must come shortly? So any sudden rise could lead to a short squeeze. We could see a steep climb at this point.

Then there is the ftse 250 entry. This will be updated in March. TW needs to be about 30p to re-enter. Any rise above this will see funds begin to buy ahead of any re-entry. So solid support should arrive somewhere above 30p.

TW has its risks for sure but the future is now a lot more secure than it was recently. The current SP though is far too low and currently provides one of the best potentials in the market for private investors to bag a good profit.

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promethean 12th Jan '09 15 of 29
1

Careful there CityTrader... here's the summary of a note from Panmure

 

Trading statement – due 13 January

Trading at Taylor Wimpey will undoubtedly be weak in the wake of the
significantly depressed market conditions. We believe that the key focus of
the statement will be on its refinancing progress and, whilst we do not expect
a new package to be announced before March, news that it is nearing
conclusion would be welcome. That said, in our view, there is a high
possibility that refinancing could be dependent on a debt-for-equity swap or
a fundraising, both of which would be significantly dilutive. We therefore
maintain our Sell recommendation.
NH:
2008E trading. Trading will undoubtedly be weak given the significantly depressed
market conditions across all of its operating regions. In the UK on a pro-forma basis, we expect units to decline by 30% and prices to fall by 10%. Given a mix of price weakness and lower overhead recovery, we forecast a 1020bp reduction in the net margin to 5.0%.
NH:
In summary, we expect PBT of £39.0m and asset & goodwill write-downs of £1,852m, resulting in a reported pre-tax loss of £1,813.0m. Pre-exceptional EPS is 2.6p, whilst our NAV forecast (post write-down) is 185p.

Write-downs. Taylor Wimpey has already announced land write-downs of £690m (11% of GAV). Of that, £585m was a provision against its UK land value. It has also
announced that further provisions are likely at the end of the year, as a result of the
weakening pricing environment in the UK. Our forecasts factor in an additional £1.2bn of land write-downs over the next few years: £200m for the year to December 2008E, £500m for 2009E and £500m for 2010E. This totals 45% GAV (2007 gross assets) write-downs throughout the cycle.
NH:
Debt and financing. We expect debt of £1.6bn by the year end, implying gearing of
82%, the highest in the sector by some way. This is the key area of focus for the group, and news that refinancing was progressing well would be positive. Lenders recently agreed to suspend the covenant testing point (1 January, when we believe Taylor Wimpey would have breached covenants) whilst discussions are ongoing. We do not expect news of a confirmed package before the results in March, and we remain concerned that a refinancing package will be dependent on either a debt-for-equity swap or the need for a rights issue/equity fundraising – either of which would be significantly dilutive for current shareholders.

Recommendation and target price. The share price has performed strongly of late, on
rumours of positive progress in its refinancing talks. Given that we believe it is highly
likely that the group will have to undertake a significantly dilutive process to secure
refinancing, we continue to believe that the risk remains on the downside and we
therefore maintain our Sell recommendation.
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CityTrader 5th Apr '09 16 of 29
1

http://www.sundayherald.com/business/businessnews/display.var.2499917.0.the_week_ahead.php

 

TAYLOR WIMPEY, one of the UK's biggest housebuilders, could give a boost to its beleaguered sector this week with news that it has finally clinched a £1.5 billion refinancing deal with its major creditors.

Confirmation could come as early as tomorrow, although a spokesman denied that there is a firm timetable as yet for bondholders to sign the formal documents. Any agreement will have to be concluded by the end of April at the latest so that the company can publish results within four months of the end of its financial year.

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MrT 6th Apr '09 17 of 29
1

Quite a strong move today - up 20% so far!

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CityTrader 11th Apr '09 18 of 29
1

Now that a few days have passed since the results were issued I just thought I would try and give a projection going forwards. After all the market is said to be always looking 18 months into the future.

Firstly the write down of assets was I feel unprecedented here. A full 50% from only last July. I felt I was being over generous in suggesting a 25% fall but 50% is really clearing out everything including the kitchen sink stuff. In a way though I find this approach comforting. For me this is a clear indication that TW simply wanted to get out all the bad news in one fell swoop. They seem to be saying that's it the only news from now on will be positive. They just did not want a steady drip drip of bad news going forwards especially if they need to be re-organising once again in a few short years.

So having written down all their land bank they should now have assets priced at rock bottom better than other house builders who re-financed last year. The implication here is that in the near future TW will have far lower fixed costs than others in the sector and so a larger profit margin. eg if BDEV valued a land plot at £50k last year then TW have just valued it at £25k this year. Plenty of scope for a larger profit here. TW announcing larger or improved profits will be much welcomed by the market.

Revenue in 2008 was nearly 25% down on the previous year. Any increase this year will have a large impact not only on income but also on debt repayment. If the current freeing up of mortgages by the HSBC become a flood then I would reasonably expect sales to rise buy £500m. This would go some way towards meeting any need for a rights issue. Not knowing how the future sales trend was arranged with the banks causes difficulty here. It may be that the banks told TW to reduce this years sales by 20% and then valued all accordingly. I doubt they would have accepted a too optimistic rise here. So for me any increase in sales would be a great positive for TW's finances.

New last week of a large housebuilder in the states being taken over shows there is still an appetite over there for buying bombed out housebuilders. Probably the ideal time to buy at the bottom instead of at the top which so many of our housebuilders did including TW! For me given the problems TW currently has it may well be an excellent time for them to regroup and sell off their stateside operation. The assets have been written down already there and a large cashpile would go a long way to getting TW back on its feet. NO wasted management time hopping across the pond and they can concentrate on the UK until they feel bolder and more able to expand. A sale here would be of immediate benefit to the company.

As for the share price I still feel 100p is achievable in the short term and I continue to hold what is a very large holding here having bought in at 10p last November.

Paul

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MrT 12th Apr '09 19 of 29
1

I agree with your kitchen sink thesis in terms of the results - http://www.stockopedia.com/news/announcement/TW./090407tw.2796q.htm. I was also quite reassured by this statement:

During the first 13 weeks of 2009, the UK housing market has performed at the upper end of our expectations, with higher than expected visitor levels and sales rates, and stable average pricing. Net sales rates per site in the UK are level with the equivalent period in 2008 and up 78% on the second half of 2008. Having reduced our stock plots last year, particularly in the more challenging product and market areas, we have not needed to increase incentives. Whilst there is usually a seasonal uplift in trading at this time of year, current performance is stronger than we would have anticipated. It appears that there is underlying demand for new housing in the marketplace despite current conditions. With the tight constraints on supply imposed by the planning system, and exacerbated by the current economic conditions, this demand is currently underpinning the market. We remain concerned about the sustainability of current conditions, due to uncertainty
over mortgage availability and general economic conditions, particularly unemployment.
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MrT 12th Apr '09 20 of 29
1

They are also now clearly very focused on cash - having learnt the painful lessons of over leverage, I hope for a good future for this business.

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Betasurfer 12th Apr '09 21 of 29
1

Playing Devil's advocate, you should note KBC's view that they aren't out of the woods yet - they have been picking through the detail of the debt refinancing deal and believes that the penalties for missing milestone payments are so onerous that issuing equity to raise fresh funds is a ‘must’.. http://www.sharecast.com/cgi-bin/sharecast/story.cgi?story_id=2707758

KBC believes £350m of new equity is needed and, if the discount is fierce enough, it could be raised through a rights issue. ‘To raise this sum, something like a 7 for 2 at 9p would be needed to give the required 40% TERP [theoretical ex-rights price] discount,’ analyst Robin Hardy calculates, noting that an issue price of 9p would be below par value which would complicate matters, as would the £277m pension fund deficit. Recent pension rules allow the trustees to demand that a proportion of new funds raised be paid to them first, rather than the banks.

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CityTrader 13th Apr '09 22 of 29

KBC seem to be taking a perennially negative attitude here. How could they possibly suggest a rights at 9p? The current SP is 47.25p Personally I doubt a right issue at all. Firstly there is over a year to go for the need fo the £350m and secondly TW would be sensible enough to know it would be far more sensible having a rights with a much higher share price. Secondly I believe sales will increase enough to meet the need for that sum and thirdly I think they would sell the USA arm.

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Gradders73 13th Apr '09 23 of 29
3

Agreed - typical analyst attempt to hide how little they understand by appearing knowledgeable.  Pension fund obligations rank pari-passu with other senior unsecured claims, so to protect them, they have the a claim on rights proceeds on a pro-rata basis with other creditors.  Seems perfectly acceptable to me, but I am sure the deficit now is much higher than £277m given decline in rates and equities.  Clearly the 10% PIK that accrues from 2010 if they don't reduce by £500m is onerous and getting the hell out of the US market makes sense if they can at a decent price.  I suspect the comments about the rights issue is more to show to the borrowers that they have more than one option to reduce borrowing.  As a general point, I am slightly alarmed by the number of rights issues being proposed as I am not sure there is sufficient liquidity to meet them all, especially banks to repay TARP money in the US, but that's an aside.

One note of caution though is if there is pressure to raise cash through unit sales as well as restrictions on new land purchases, TW could find itself selling property on the cheap and short of assets for a recovery if it doesn't come until 2011 or later. 

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Gradders73 21st Apr '09 24 of 29
1

Does the government announcement of a £1bn boost for housing projects mean anything for TW?  Question is, does it mean anything at all, or is it a reannouncement of something given earlier?  

At the least it's a government statement that in the longer term there is a lack of supply in the housing market, which is the main difference in dynamic between UK and USA...

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valueinvestor 26th Oct '09 25 of 29
2

I have written up an article on Taylor Wimpey here. Not my cup of tea for the time being and the article outlines why. Comments welcome! http://www.stockopedia.com/article/view/32733/taylor-wimpey-tw-too-much-too-soon

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Fangorn 26th Oct '09 26 of 29

Great article Value. A thoroughly interesting read, particularly as I hold Taylor Wimpey, albeit not from it's historic low mind you you.

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Fangorn 3rd Aug '10 27 of 29
1

http://www.investegate.co.uk/article.aspx?id=201008030700124024Q&fe=1


Interims are out. Wimpey's rehabilitation continues it seems.

Continued reduction in debt position, no major exceptionals

Seriously thinking about a top up - market likes these figures too.

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nigelpm 3rd Aug '10 28 of 29

I'd say Galliford Try (LON:GFRD) is a much better play on improving fundamentals in the housing market.

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Fangorn 3rd Aug '10 29 of 29
1

Thanks for the heads up Nigel. Let me go take a look. TW has been a long term favourite sitting alongside my old sorely missed trading play (Pilkington)

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