Savills does not look like a recovery play

As predicted, Savills' (SVS) earnings and profits tumbled last year as interest rates rose everywhere creating a global real estate downturn. The property services companies' international diversification is a strength in good times, but not so much when things turn south all over and all at once.

True, revenue only dropped 3 per cent, but Savills' wafer-thin margins and rising business costs, mostly related to wage inflation for its 40,000-strong army of real estate professionals, meant pre-tax profit and earnings per share sank. That employee roster is another example of a strength in good times but a weakness in bad.

All of which is to say Savills is a highly cyclical business, despite its overtures to the contrary with its focus on the sort of property services companies always need, such as building and facilities management. Ultimately, Savills is a dealmaker. Whether selling flats in China or renting warehouses in Germany, it is a business that does well when the real estate market is doing well. Right now, it is not.

Consensus forecasts seem bullish that Savills will recover. On that basis, its price-to-forward-earnings ratio for this calendar year is 15.5. We see this as highly speculative, considering how unpredictable a property market recovery and the dealmaking Savills depends on can be. Based on the current PE ratio alone, Savills looks far too expensive.

There is also not much value in Savills' balance sheet. The company's debt is not worryingly high, but it doesn't leave much room to invest in the business to take advantage of a global property recovery, either. Throw in a paltry dividend yield, and we are unsure what investors get at this price. We maintain our bearish rating. Sell.

Last IC view: Sell, 929p, 21 Sep 2023