Stockwatch: Join this acquisitive insider

Has Savills fallen too far? The chart shows shares in the upmarket estate agent reversing all their 2015 gains, down from nearly 1,000p last summer to about 650p just recently. The main fall was this year from about 900p and, unlike some other cyclicals, there was not much rebound in Savills, despite investors regaining risk appetite - the shares still trade at just 706p following the 2015 prelims.

Current rating has proved a buying level

On a "normalised" view, current prices mark about 11 times historic and 10.5 times forward earnings, for a well-regarded professional services group serving the higher end of the international real estate market.

When I initially drew attention at 280p in October 2011 it was, quite similarly, on a prospective price/earnings (PE) ratio of 10 and yielding about 5%, relative to about 4.3% today. Fair respect to the proverb "you can never step in the same river twice" (i.e. currents differ), but the situation is interesting. 

The valuation context is Company REFS showing an annual average PE in the mid-teens from 2012-15, most likely helped by loose monetary policies boosting asset values and property service activity. Ultra-low interest rates and quantitative easing may have reached diminishing returns, and some higher-end segments of international property represent bubbles about to burst, yet the global elite are not going away.

Property will remain very significant to wealth management, and being a quality operation means Savills always recovers from any setbacks. 

The chief uncertainty is what extent of risk in the property cycle the stock discounts. As yet, broker forecasts are cautious. The table shows only 3-5% normalised earnings growth for 2016 and 2017, although that's based on only two analysts. 

Exceptionals distort profits picture

The 2015 results are pretty much in line with forecasts, but include significant exceptional items, primarily £23.3 million acquisition costs, up from £16.6 million. This appears substantially related to a lock-in arrangement for key personnel in Studley Inc, a US acquisition in spring 2014 and, while it distracts from underlying profitability, it's still a cost borne by shareholders. 

Savills' 21% rise in 2015 underlying pre-tax profit to £121.4 million can, therefore, also be seen as a 16.4% rise to £98.6 million, on revenue up 19% to £1,283.5 million. With a higher tax charge also last year, these two factors explain a modest 3.5% rise in net profit, hence basic earnings per share (EPS) only marginally ahead. 

That's some contrast with normalised EPS up 14% to 63.2p with the total dividend up 13% to 26.0p (figures in the table refer to the timing of dividend payments in a calendar period).  No dividend forecasts have appeared for 2016/17, but, with £182.4 million balance sheet cash, it looks comfortably fair to target about 30p per share - for a prospective yield of 4.3% - which ought now to be providing support.

Savills' main business is in the UK, where a 25% increase in transaction revenue helped achieve £71.7 million underlying profit on revenue up 11% to £560.1 million, with strong commercial markets more than supplanting weaker residential. There was excellent progress in the US - £18.3 million profit on revenue up 71% to £192 million - a continued recovery in continental Europe, with £8.9 million profit on revenue up 20%, and market share gains in Asia which enabled 13% revenue growth to £401.1 million, albeit with profit down marginally to £34.2 million.

Good start to 2016

In its outlook statement, management strikes a note of caution regarding the impact of global macroeconomic and political concerns on real estate markets, in particular various Chinese cities. UK residential and commercial investment markets are also expected to be subdued as stamp duty reforms affect the former and both may be affected by June's European Union referendum.

However, there is a positive tone, too: "We have made a good start to 2016, with a solid pipeline of business carried over from last year in many markets...the strength of our enlarged US operation, the increased size of our investment management, property management and consultancy businesses, also the breadth of our UK business together with further improvement in continental Europe, all bode well..."

The next trading update will be at May's AGM. 

Chairman designate buys £100,000 of shares

One notable financier has already decided the business's potential rewards outweigh the macro risks and accounting matters. Straight out of the results closed period on dealings, Nicholas Ferguson bought 14,286 shares at 700.6p, a maiden purchase. 

He was appointed last January, initially as a non-executive director, and is due to become Savills' chairman at the May AGM. Currently chairman of Sky (broadcasting), he was a founder of Schroder Ventures and has chaired several major private equity groups, so ought to be a shrewd judge of cycles and periods and when to buy and sell. 

Savills does not appear on the radar for hedge funds targeting property-related stocks, in the way Berkeley Group Holdings is a crowded trade to be short of Prime Central London property. The only reported short position in Savills is Brookfield Investment Management Inc., which trimmed its exposure to 0.57% last July. So the early 2016 drop in the stock relates more to sentiment than any risk of manipulation by hedge funds.

If you are in the bearish "armageddon" camp - deflation spurring a collapse in asset values - it may be hard to summon conviction for Savills. But this has caused plenty of excess falls in cyclical stocks this year, and "muddling through" may be the more likely economic scenario. In which case - and despite a remuneration issue removing the growth shine - Savills' risk/reward profile appears to favour upside. 

For more information see their website.

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.