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Diversity underpins Savills

Savills enjoyed a bumper 2014, but the new year presents short-term challenges
January 22, 2015

What's new

■ Commercial deals boost profits

■ UK residential market faces election challenge

■ Diverse revenue streams support underlying growth

IC TIP: Buy at 708p

The fortunes of UK estate agents bear a strong correlation to the health of the housing sector, but Savills (SVS) has a more diverse revenue stream than most. It boasts thriving commercial property divisions in the US, Europe, China and Hong Kong as well as the upmarket housing business that underpins the UK brand. With such a broad area of coverage, it's inevitable that there will be significant variance in regional performances. But the underlying performance for 2014 was impressive: in a trading update Savills revealed that profits for last year are expected to be well ahead of earlier expectations. The shares duly jumped about 8 per cent.

The reason given for the upgrade was a very strong December for Savills' transactional businesses. It closed a number of big commercial-property deals in London and on the continent. And despite a more difficult London residential market in the second half, trading in December was boosted by a rush of completions as buyers moved to beat the imposition of higher stamp-duty levels on expensive homes.

As usual, Savills has adopted a more cautious tone for the start of this year. The rush to beat the stamp duty deadline will not be repeated, while the general election is expected to weigh on the UK residential business. Management also cited uncertainty around "the timing of a sustainable recovery in Hong Kong".

 

Numis says…

Buy. Following Savills' positive trading update, we have upgraded our pre-tax profit forecasts for 2014 from £90m to £99m, and from £105m to £107m for 2015. While some uncertainties remain over the UK residential market and a subdued Hong Kong market, we expect to see growth in the US following the acquisition of US commercial real estate services firm Studley. We also expect to see the benefits of a recovering market in mainland Europe, supported by low interest rates and the prospect of quantitative easing. Despite recent gains, the shares trade on 12 times forecast 2015 EPS of 90p a share. Given the group's impressive track record, diverse business model and strong growth profile, that looks too cheap relative to peers.

 

Barclays says…

Overweight. Savills is expected to deliver pre-tax profits well ahead of our earlier £89m forecast. Although there is an element of pull-through here as a result of an earlier than expected close of a new Nordic Logistics Fund, which brought forward revenue expected in the first quarter of this year, the latest trading update is a powerful reminder of the group's diversified business model. This is particularly important because the group receives over half of its revenues from non-transactional sources such as consultancy, property and fund management.