As UK mortgage rates continue to rise can top builders such as Taylor Wimpey & Persimmon deal with higher costs? We'll look at the financials.

In recent weeks mortgage rates went higher as the Bank of England raised interest rates to 5% with more analysts forecasting further rate hikes to tackle inflation, but what does this mean for two of the largest house builders in the UK, and are they prepared for a possible downturn? In this article, we’ve broken down the information from the last financial year in anticipation of H1 results due in the coming weeks from both builders.

We analysed 2022 results looking at revenue, profit, and assets to determine which builder could be in a better position.

Persimmons' margins are shrinking.

We reviewed overall profit margins in 2022, 2021 and 2020 and noticed that in the most recent financial year, Persimmons' profit margin shrank from 21.8% in 2021 to just 14.7% in 2022, representing a large 32.5% drop in margin. Investors saw this reflection in their dividends though. Overall base revenue had increased 5.6% Year on year with 2022 revenue a record £3.815bn vs £3.61bn in 2021. Profit for the year after tax came in at £561m however to match 2020 & 2021 profit margins it should have been around £760m-£800m. coincidently rates also started to rise at the end of 2021.

Looking at the balance sheet, total assets remained strong at £5.034bn in 2022, vs £4.79bn in 2021. Cash on hand however fell significantly from £1.246bn in 2021 to £861.6m in 2022, a reason for concern. In such a market, cash could be king to help navigate turbulent times. Debts also increased as well disproportionately to asset appreciation. In 2021 liabilities were £1.17bn, in 2022 this was £425m higher at £1.595bn. Total net assets as a result fell from £3.625bn to £3.44bn. As a result, their Liabilities/Assets ratio rose from 24.4% in 2021 to 31.6% in 2022 – another possible concern.

Taylor Wimpey is holding, for now.

Unlike Persimmon margins for Taylor Wimpey remain in an upward trend therefore H1 results will be important to investors to see if this will be a continuation or a reversal in margins. Net profit margins for 2022 were 15.97%, up from 12.96% in 2021 and 7.7% in 2020. Revenue remained strong at £4.419bn in 2022, up from £4.284bn in 2021. Overall, the trajectory is what investors would want to see.

Looking at the balance sheet, assets remained strong at £6.48bn up £243.3m year on year. Cash remained strong at £952.3m in 2022 up £31.3m from 2021. Debts did increase with liabilities up £55.2m to £1.981bn in 2022 however assets gained more than liabilities. As a result of this Taylor Wimpey’s Liabilities/Assets ratio dropped to 30.5% in 2022 from 30.86% in 2021.

Who’s looking better then?

Comparing the data above, which is taken from both companies reporting Taylor Wimpey does take an edge. Financials have revealed profit margins remain in line with expectations along with revenue, assets, and cash. As an added bonus debts are also down slightly. However, both charts look very negative right now and the downside for the property sector in general looks to be persistent as recent reports have suggested interest rates in the UK could hit as high as 7% which will certainly damage demand for all property builders as affordability becomes squeezed.  

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