Taylor Wimpey margin pressure, and William Hill focused on US as UK regulation bites

“After US markets endured their worst two-day losing streak in two years the FTSE 100 was on track to close below the 7,000 mark for the first time in a year on Wednesday as fears over the spread of the coronavirus grow,” says Russ Mould, Investment Director at AJ Bell.

“European shares were also under significant pressure as several countries on the continent announce their first cases. Germany’s DAX index drops 1.2%, overnight Japan’s Nikkei 225 index was down 0.8%.

“The correction for equities reflects the reality that the impact of this outbreak is likely to be far-reaching and lead to pressure on company’s revenue and earnings. Alcoholic drinks maker Diageo becoming the latest high-profile company to flag an impact this morning.

“Brent crude actually bounced slightly on hopes OPEC will cut production, up a few cents to $55.28 a barrel."

Taylor Wimpey

“A key takeaway from housebuilder Taylor Wimpey’s results is the big step back in margin performance.

“For several years conditions were set fair for the industry with low interest rates, plenty of mortgage availability, the Help to Buy scheme stoking demand and house prices continuing to rise.

“Now build costs are increasing and asking prices are stalling, and this is inevitably having an impact on levels of profitability. Though Taylor Wimpey doesn’t appear to be willing to give up 20%-plus margins without a fight.

“This means tight control of the purse strings but also a reduction in volumes to better capture value. Management also hope to see build cost inflation ease.

“Any cost cutting needs to be balanced against the need to maintain build quality – an issue which has tripped up a number of Taylor Wimpey’s rivals.

“The company points to the improved political outlook as it sounds a positive note on 2020 performance. Sales per site are at record levels and the company is forward sold on nearly half its expected completions for this year.

“The strong cash position, a trait shared with much of the rest of the peer group, means continued generosity in terms of returning capital to shareholders.”

William Hill

“The tide of regulation has apparently turned against the gambling sector in the UK and this was reflected in spades in William Hill’s full year results.

“The company trumpets the year as a ‘well executed year of transition’ or in other words ‘we just about got through by the skin of our teeth’.

“Adjusted pre-tax profit halved and the dividend is down by a third as the company counted the cost of the introduction of a £2 stake limit for fixed odds betting terminals.

“These machines were a cash cow for the industry but for every winner there has to be a loser in betting and they always risked catching the eye of the authorities given the negative impact on punters.

“Interestingly the company’s high street bookies actually did a bit better than feared in the 12-month period and it was the online and existing US businesses which came in slightly below expectations.

“For William Hill the future is likely to be about its US expansion, where its ability to keep costs in check for now is an encouraging sign.

“The company has been in a race with other gambling firms to gain market share in the US market since it opened up 2018.

“The company had a bit of head start having set up a business in Nevada in 2012 and it is already the largest sports betting business across the Atlantic.

“The deal earlier this month with CBS Sports giving it exclusive rights to promote the brand across the latter’s online properties could help super-charge progress across the Atlantic.

“But with its chips heavily staked on the American market, William Hill will be crossing fingers and toes that there aren’t any regulatory setbacks here. The US Presidential election in November is a possible risk factor to watch.”

These articles are for information purposes only and are not a personal recommendation or advice.