Homing in on how Savills spread its property net far and wide
Global consolidation, the effects of which are being hammered home by the debate over the future of Aer Lingus, has changed the face of a large number of industrial sectors, some obvious and some not so well-known.
The presence of creeping consolidation in the auctioneering and property business, for instance, was a development that happened without much flourish, unless you happened to be in the business yourself.
Suddenly companies such as Savills, which is in the spotlight this morning, emerged as international giants in the property game.
It is now the fourth-largest in the world, buying, selling and giving consultancy advice on not just homes but also office, retail, industrial and hotel properties through a network of 600 offices around the globe. It employs 27,000 worldwide and has a market value of £1bn (€1.35bn).
Founded in the mid-19th century by Alfred Savill, it was until the mid-20th century that the first real consolidation of Savills started following its merger with commercial property specialists Rees Reynolds and Hunt.
By 1989 it had become a listed company on the London Stock Exchange and today is a constituent of the FTSE 250.
At that stage its global ambitions came sharply into focus. It acquired a property company in Asia, followed by the acquisition of a property specialist in Spain, Germany, France and Italy, and purchased the Irish auctioneer Hamilton Osborne & King. Recently it acquired a US property commercial services company, Studley Inc. Its fund management operation, Cordea Savills, has also been active, buying companies in Germany, Singapore and Sweden.
Property collapses are dodgy moments for property consultants and during the historic 2008 property meltdown, Savills turned in a pre-tax loss of £8m.
A change in strategy was required, so instead of picking off profits from deals, which was the previous modus operandi, the group focused on investing in reoccurring revenue streams. It also cut its losses in Europe, retreated from Spain and Italy but increased its presence in Paris and some major German cities, anticipating a property rebound, which happened.
Today, Savills has a spread of revenue worldwide and is not confined to the UK, though Britain is still an important market. The rush to beat the introduction of higher stamp duty in the UK on expensive homes will help Savills results this year, but it is a one-off.
However, while a buoyant London housing market helps, it is undependable as politics could have an impact in this market. The impending British general election and British Labour Party's proposed mansion tax could swing things around.
An additional problem for Savills is the cooling of property fever in Hong Kong, with the market there declining for the third year in a row. However, the company is bullish on the US following its acquisition of Studley.
While there is some optimism as to the European market given the low interest rates and quantitative easing, it is still too early to call.
Savills now has a good business model, and a spread of revenue supporting its underlying growth, with half of group revenue coming from consultancy and fund management.
Revenues last year are expected to exceed £1bn, a company record. Pre-tax profits are forecast at £100m, almost three times Savills profits four years ago. Estimates for this year are bullish with £1.2bn in revenues and pre-tax profits of £105m.
Shareholders are happy with the recent share price of £7.22, below an all-time high of £7.40. This contrasts with its low of £2.00 six years ago. Its price-to-earnings multiple is an undemanding 17 and investors also seem pleased with margins.
However, the current expectation of a 10pc profit margin compares with a 12.4pc return in 2007, before the crash.
While Savills operates at the high end of the property market, its strategy of avoiding debt and a spread of income sources from non-traditional areas is succeeding and should offset any threats to its UK market.
For euro investors the problem at this time is not the company but the rate of exchange.
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.