Taylor Wimpey short term prospects

Until now I've been looking at the longer-term prospects for Taylor Wimpey, but I think it's worth looking at what its balance sheet, cash flow and income might look like over the next few years. The main point is to see whether a rights issue is likely to be needed, but it's also an exercise in testing my predictive powers - I'll come back to this post when TW publish their interim and annual reports.

Base point - end-2007
Inventory: £6bn
Receivables: £400m
Cash: £130m

Current Payables: £1540m
Non-current payables: £400m
Debenture loans: £820m
Bank loans: £700m
Retirement benefit obligation: £200m

There are various other assorted items that are small enough to ignore for my purposes. At the moment TW has assets of £6.54bn and liabilities of £3.66bn, according to my numbers. That's close enough for my purposes.

TW's average house price is about £200k. Their gross margins are about 15%, so £30k of that. About £50k is the land. So construction costs are about £120k per house. £2bn of construction suggests that they have the equivalent of about 15k houses (e.g. 5k complete houses and 20k half built). They sell about 20k in a year, so this is about 9 months supply.

Mid-2008
Over the whole of 2007, TW had revenue of £4.7bn. Their latest trading statement (in April) stated that their order book was down 26% by value, so lets assume a further worsening and say that total sales were down 35% over the 6 months. That suggests about £1500m in positive cash flow, or 7,500 houses.

Assume a 25% decline in receivables, which will represent a positive cash flow of £100m.

Assuming they are building at 50% of the previous rate, that suggests they will have added 5k houses, but sold 7.5k, so a decline in the inventory from 15k to 12.5k. They will pay £600m in construction. They have operating expenses of £150m, and interest costs of about £90m.

Assume no land spend. Assume no more share buybacks.

The dividend will cost them £110m after tax, so about £160m before tax.

That's a net positive cash flow of £600m, generated by using land faster than they are replacing it and a reduction in inventory.

Net debt in April was reported as £1.9m. Assuming no new debentures, that suggests bank loans up to £1.2bn. Perhaps fewer land creditors, if they are depleting their land bank? Assuming this comes down to about £1bn by mid-2008, I estimate their balance sheet as looking like this:

Inventory: £5.4bn
Receivables: £300m
Cash: £200m

Current Payables: £600m
Non-current payables: £300m
Debenture loans: £800m
Bank loans: £1bn
Retirement benefit obligation: £200m

Assets of £5.9bn, liabilities of £2.9bn

End-2008
Let's assume conditions continue to deteriorate. Volume continues to decline, average sale prices are down from £200k to £160k (20% decline). There has been a freeze on new development, and the inventory is being further depleted. TW have laid off a third of their staff but redundancy payments mean that the benefits have not been seen yet.

TW sell only 2,500 houses, for revenue of only £400m. Receivables decline a further £100m for total positive cash flow of £500m.

The interim dividend is paid in stock.

The inventory remains static at 12,500 houses, due to completing existing developments. £300m is spent on development. £100m on interest payments, operating expenses are £150m.

There are various write-offs on the value of land and developments in progress, to the tune of £1bn.

Balance sheet:
Inventory: £4.3bn
Receivables: £200m
Cash: £100m

Current Payables: £700m
Non-current payables: £0m
Debenture loans: £800m
Bank loans: £1bn
Retirement benefit obligation: £200m

Assets of £4.6bn, liabilities of £2.7bn

Mid-2009
Volumes are starting to pick up in the UK, but prices are still low. North America is beginning to recover.

Average sale price is now £150k. 5,000 sales for revenue of £750m.

TW begin developing at a reduced rate. They spend £300m on 2,500 houses. £100m on interest payments and a now-reduced £100m on operating expenses.

TW resume a modest and very selective land-buying program. The final dividend is not paid. Land spend is £150m for 5000 plots, ensuring their land bank remains neutral in size.

Total positive cash flow of £150m.

Balance sheet:
Inventory: £4bn
Receivables: £200m
Cash: £100m

Current Payables: £400m
Debenture loans: £750m
Bank loans: £1.1bn
Retirement benefit obligation: £0m

Assets of £4.3bn, liabilities of £2.25bn.

End-2009
Continuation of the earlier part of the year. Market appears to have bottomed in the UK, and there is a slight improvement in sales prices to £160k.

5000 sales for £800m revenue. Construction costs are squeezed somewhat, and construction spend is £500m for 5000 houses, keeping the inventory neutral at 10,000. £200m on interest payments and operating costs.

Land continues to decline in value. TW buys 5000 plots for £100m.

Due to decline in land values, TW writes down the value of its land bank by a further £500m. But: gross margins are now up to 25%.

Balance sheet:
Inventory: £3.4bn
Receivables: £200m
Cash: £100m

Current Payables: £600m
Debenture loans: £720m
Bank loans: £800m

Assets of £3.7bn, liabilities of £2.15bn.

Mid-2010
Volumes are returning to normal across the board. Land values are bouncing back, reducing gross margin to 20%. Average sale price is £170k.

TW sell 8000 houses for £1.4bn, clearing £280m gross profit. Interest payments and operating costs are £180m.

Due to the recovering market, TW's balance sheet is no longer an issue. Pre-tax profit is £100m.

End-2010
Volumes are pretty much back to normal. TW sell 10,000 houses for £1.7bn. Margin remains at 20%. Gross profit is £340m. Costs are £180m. Pre-tax profit is £160m.

TW start building their land bank, which will drive future growth.

End-2011
TW sell 25,000 houses during the year for revenue of £4.5bn. Gross margins have declined to 15%. Costs over the year are £325m. Pre-tax profit is £350m.

End-2012
TW sell 30,000 houses during the year for revenue of £6bn. Margins remain at 15%. Gross profit is £900m. Costs are £400m. Pre-tax profit is £500m.