Jefferies says Taylor Wimpey is 'more dolphin than goldfish'

13th May 2014 11:48

Jefferies reiterated its 'buy' recommendation on Taylor Wimpey as the housebuilder set out ambitious medium-term targets and confirmed a generous new cash return policy.In a similar strategy day event in 2011, the group changed its strategy from one of volume to value. "Some critics thought that the focus on internal change missed the point and likened TW to a goldfish unaware of the challenges outside of the bowl," said the broker. "In our view, today's strategy update suggests that back in 2011 TW was demonstrating the intelligence and dexterity of a dolphin rather than a goldfish. Maybe it was the analysts who were the goldfish, unable to join the dots themselves, waiting to be spoon fed guidance from management and IR."TW has set out to target average operating margin of 20% over 2015 to 2017, a return on net operating assets of 20% per annum, average increase in net assets of 15% per annum over the three-year period, and cashflow conversion at an average of at least 65% operating profit into operating cashflow.Jefferies was keen to point out that the updated guidance does not imply a change in strategy, rather a demonstration that "the value strategy is working and that when coupled with the current housing market it is likely to deliver returns ahead of those originally guided to, which assumed no recovery in the low volume UK housing market". The broker said it was not changing forecasts until further detail emerged. "Were we to be more dolphin like, our analyst sonar suggests that, the scenario implied by today's guidance could enhance consensus estimates for full year 2015 and 2016 by around mid single digits." Taking the cash conversion target of 65% at face value suggests that the potential sustainable cash return could be in the region of £300m a year, which when coupled with the maintenance dividend of around 1% of triple net asset value implied from 2015 onwards there could be a dividend per share of around 10p per year, "perhaps". "In our view today's guidance further underpins an attractive valuation story. The guidance is based on current market conditions and is not therefore a fishy tale based on yet to be seen house price inflation and transaction growth. However, we do believe that the valuation of the shares has become divorced from the underlying fundamentals and that concerns over changes to mortgage rates and political risks surrounding 'Help to Buy' are overdone."At 106p Jefferies' target price of 151p suggests 42% upside.OH