Savills' outlook mixed amid economic uncertainty

Making sense of Savills’ (SVS) performance as a global recession looms is a bit like trying to trace the path of a feather during a hurricane. The property services company generates revenue from so many different business arms in so many countries that it can be difficult to comprehend why pre-tax profit was down as revenue ticked up in its results for the six months to 30 June. In short, though, the company’s UK business arm has a better margin than its international business arms – and its European and Middle Eastern business made a loss.

In a way, this makes perfect sense. The business was born and is based in the UK, so it is understandable that the British arm is cheaper to run. As such, it might be tempting to argue that this is where the company should focus its energies. The catch there, though, is that Savills does not have much more room to grow in the UK. Along with CBRE (US:CBRE), JLL (US:JLL) and Knight Frank, Savills is one of the so-called ‘big four’ property services companies which have been jockeying for position with each other for years. There is little to suggest that Savills can capture much more of the UK market than it already has, certainly not if its competitors have anything to say about it, so global expansion seems like the next logical step. 

Yet, as can be seen from its results, doing so has not been easy. Chief financial officer Simon Shaw explains that economies of scale are a big factor in why the business is more cost efficient in the UK than in the countries it is expanding into. The difficulty with Europe and the Middle East, in particular, is the sheer number of languages and countries that Savills needs to get its head around and base itself it. Considering its low debt position the company could in theory take on more debt to help it grow in these markets, but Shaw considers it a point of company pride that Savills has maintained such low borrowings for so many years.

As for the valuation of this stock, the price/earnings ratio is good but the price to net asset value is quite high. Taken in the round, we continue to see this stock as well priced but would urge investors to exercise caution in the current economic climate. Hold.

Last IC View: Hold, 1,165p, 10 Mar 2022