Savills (SVS)

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Stockwatch: A share still worth backing
Is Savills (SVS)' soaring chart a signal to board or avoid? Plenty such "quality cyclicals" took off in 2013, then spent a year or so consolidating as investors locked in gains and mulled whether the firms would deliver the anticipated profits uplift. Savills is a special case, genuinely doing so, but a lot of money chasing what precious few growth situations means the stock is stretching further from underlying value.

Leading name in a now buoyant sector

I have repeatedly drawn attention to Savills since 280p in late 2011 when interims showed a 20% profits jump, for it is a top name in international estate agency and property services, well-established in Asia Pacific, and commands a strong position in the UK which represents about half of group turnover/profit. See how it pays to buy into an industry leader when the business cycle is against it and sentiment weak, with the market ignoring strengths.

Now that QE and low interest rates have buoyed asset prices and transaction activity, the business is going gangbusters. In 2015, the Mid 250 shares have rocketed 50% to about 950p, initially helped by a New Year update citing: "strong December performance across our transactional businesses...revenue and profits significantly exceeding our previous forecasts for the month" hence underlying results for 2014 to be "well ahead of our previous expectations."

Savills - financial summary

Broker estimate

Year ended 31 Dec

Turnover (£m)6777228069051078  
IFRS3 pre-tax proft (£m)36.8405270.184.7  
Normalised pre-tax profit (£m)41.647.355.676.1101109119
IFRS3 earnings/share (p)19.820.928.238.145.3  
Normalised earnings/share (p)23.626.731.443.557.259.764.1
Earnings growth rate (%)1101317.938.431.54.47.4
Price/earnings multiple (x)    16.415.814.7
Price/earnings-to-growth (x)    0.53.62
Cash flow/share (p)58.430.552.659.676.5  
Capex/share (p)  
Dividend per share (p)913.29.710.210.8  
Dividend per share growth (%)5046.1-  
Yield (%) 
Covered by earnings (x)2.72.412.42.83.2  
Net tangible assets per share (p)42.8405988.562.3  
Source: Company REFS.

Adding a note of caution regarding UK residential sales in the first half of 2015, due to general election uncertainties, the surprise outcome of a majority Conservative government is now driving speculation of golden years ahead for trading and servicing high-value properties/estates. Fears of a mansion tax have been scotched with Labour staring at its navel, contemplating a shift to middle-ground politics.

Valuation largely rests on a P/E in the mid-teens

Currently, Savills trades on a forward price/earnings multiple of about 16, reducing to 15, which strictly needs more evidence of beating expectations when the table shows earnings per share projected to moderate into single figures. While only for a short-term period it means the PEG ratio stands at a whopping 3.6, falling to 2 times, when really you are looking for a value under 1. Note that despite the 2014 results declaring a 21% rise in the dividend to 23.0p a share, the prospective yield is a modest 2.5%, with the board maintaining earnings cover of about three times - being wise to the unknown risks of cyclicality. Market value is also about four times net assets, including goodwill/intangibles, so a lot rests on the earnings trend.

The market forecast (which has yet to incorporate a dividend) is based solely on Numis Securities, which is Savills’ broker, dated 22 April, while a latest AGM statement cites year-to-date trading slightly ahead of internal expectations and substantially ahead relative to 2014. This prompted the stock to rise well above 900p despite management cautioning: "The election result was positive for residential market sentiment although it is too soon to gauge how volumes may recover in the second half of the year...typically the first four months represent a disproportionately small element of the full-year out-turn. Against a backdrop which remains broadly supportive of global property markets, we anticipate that our performance will be in line with expectations."

Ultimately, Savills' fortunes depend on how the global assets party plays out; whether there is any shock to the system and central bankers can yet again find the right accommodative measures. There is no crystal ball.

Acquisitions may help to beat expectations

See how in the last year, Savills has struck earnings-enhancing deals to increase the group's size roughly by 15%. This introduces an uncertainty where you (or indeed management) are guessing how those businesses will perform once integrated: will there be better or less-than-expected, synergies? It could be that Savills is guiding the market and its broker conservatively to avoid any upsets, yet the deals kick performance amid industry momentum.

Studley Inc was bought in May 2014 for up to £154 million equivalent, transforming US capability and providing a main driver of transaction advisory revenues up 38% last year. This last March, SEB Asset Management was bought for up to £15.6 million equivalent, creating a substantial European investment management business with £10.8 billion equivalent combined assets and an Asia Pacific platform with £1.4 billion equivalent. Then in April Smiths Gore, a long-time partnership managing private estates and advising on transactions, was bought for up to £40 million in cash. These all look well-chosen and with scope for "2 + 2 = 5" once integrated - but it's speculative.

Stock is now prone to momentum buying and "a moment of truth"

Savills is symptomatic of the current market; value investors looking askance at its few pockets of growth being rated ever-higher. You can't define a margin of safety at this level. Yet barring summertime jitters the likely scenario is Savills' continuing to enjoy a high rating, it being impossible to say whether this could be 20 times earnings or whatever. The longer it persists though, the more downside risk when the cycle does cool. Eventually there will be a moment of truth when (a combination of) macro events and/or a trading update disappoints.

I concur with Numis' 'add' stance, but clarify as follows: ideally you'd already have significant gains, and increasing exposure for the medium term makes sense - the company deriving about half its business from high-value UK property, and a Conservative majority government seen as supportive. A fresh 'buy' stance, however, brings risks of disappointment on a two-year view. It may be premature to sell, but mind if the chart proceeds to show any exhaustion. Savills is shaping up as meat for alert, long/short traders.

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This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.


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