Edmond Jackson's Stockwatch: Savills

Despite all the talk of "Fed tapering", i.e. the US central bank reducing its money printing, there is a school of thought that central bankers are trapped in quantitative easing (QE) policies and unable to escape.

Marc Faber is one proponent and while his "GloomBoomDoom" stance can seem "off-the-wall", last May I found myself in a mountaineering group with an economics fellow of Cambridge University - pillar of the establishment - who was of similar opinion: that central banks will inflate debt away, over decades. As if Mark Carney's declaration to retain ultra-low interest rates for another three years isn't enough to send shivers down the spines of cash-based savers and those relying on pension annuities.

Yet it procures an environment that should be long-term bullish for certain areas of the economy: for example those that are asset-based or servicing the asset economy. The bull market is liable to be punctuated with the occasional panic along the way, but if QE is effectively baked into the system then it is worth being aware which stocks can benefit - if for no other reason than to avoid the deteriorating value of cash.

The latest interim results from Savills, a FTSE 250-listed international real estate adviser, are a good example. Group pre-tax profit is up 25% to £21.4 million and underlying pre-tax profit is soaring, by 40% to £26.0 million, on revenue up 13% to £399.0 million.

Unlike other companies' results I have analysed recently, Savills is growing revenue by double digits and its soaring profits are not mainly a result of margin improvement and/or lower debt charges.

The board appears cautious, however, not to substantially expand the dividend; a 6% rise in the interim payout to 3.5p compares with underlying earnings per share (EPS) up 26% to 15.0p and basic EPS up 12% to 12.2p. Most likely the directors are mindful of cyclicality in this service industry and aim for substantial earnings cover to stand the best chance of a consistent dividend profile relative to the sharp cut that was needed in 2009 (see table).

With Savills more than doubled to about 630p since its lows during the uncertain years of 2009-11, even with good dividend growth its prospective yield is now under 3%, while the 12-month forward price/earnings multiple (P/E) is near 16 times. Comparatively, when I drew attention to the shares in October 2011 as offering good value at 280p it traded on a forward P/E reducing under 10 times and a prospective yield of 5%. From this you can see the effect QE has had, re-rating shares most exposed to the inflation of asset values, also boosting underlying dynamics.

As traders fret over QE tapering, profit-taking has crept in: after Savills hit a long-term high of 666p on 7 August just ahead of the interim results, its price dropped. I suspect however that easy money policies will persist for both residential and commercial property markets to remain buoyant; Savills says "we currently see no change in the overall outlook for our business".

Management is not crediting central bankers but cites "group performance benefiting from strategic acquisitions and recruitment during the past few years which are delivering market-share gains and margin improvements in core markets". I see this as a microeconomic i.e. company-level influence coinciding with the supportive macro context, boosting performance.

Principal activities are doing well, but not all operations are. Pre-tax profit from transaction advisory revenue has doubled over the first half of 2012 to £14.6 million, and consultancy is up by 40% to £6.3 million, however property and facilities management is flat at £7.8 million and investment management saw profit slip from £1.8 million to £0.9 million.

Like Pendragon, the FTSE SmallCap motor retailer I recently commented on, the group has yet to fire on all cylinders but Savills' main divisions have ensured double-digit group revenue growth, hence the P/E rating has expanded to the mid-teens - even for a cyclical - compared with Pendragon on about 12 times even after a sustained rise in price. The market broadly reckons this property cycle has plenty longer to run.

Since Asia Pacific accounted for 41% of Savills' 2012 group revenues, the destiny of the Chinese economy is the most significant risk factor. Over-lending, especially to the construction industry, has been seen as raising the probability of a crash, although mindful of this the authorities appear to have acted swiftly and recent Chinese economic data has been robust.

The UK and Asia Pacific together account for 90.1% of group revenue, growing by 13% and 14% respectively in the first half of 2013. The Bank of England is clearly going to persist with low interest rates and QE, hence China is the one to watch - and where you can never be sure. So far, it has defied short-sellers betting on various alleged risks, from a construction/property bust (creating waves across the region) to a demographic crisis.

Savills has for a while now indicated it anticipates a reduction in activity levels in Hong Kong and Singapore as government measures affect the transaction pipeline in the second half of 2013. But if you think China will be stronger in, say, five years' time then the estate agent's excellent positioning in Asia Pacific should justify the "growth" element in its shares' rating.

For more information see savills.co.uk.