A Chinese property boom has fuelled Savills' recovery.
Perhaps you're bullish on house prices, but you're worried that regulation, political interference, and onerous capital requirements will limit the banks' ability to profit from them in the future?
You might then investigate the up-market real estate agent and advisor Savills (LSE: SVS), which last week released very strong half-yearly figures to June 30.
Revenues were up 23% compared to this time last year, group profit before tax was £14.4 million against a paltry £100,000 in 2009, and basic earnings per share were 7.9p, compared to just 0.7p a year ago. The company even reversed its small debt position to report £20 million net cash.
It all adds up to what Savills admits was a "better than anticipated performance".
Sadly though, the company merely held its interim dividend at 3p per share (it was halved in 2008). Analysts are looking for a yield growing to almost 3% for the full year ahead.
A recovery made in China
As far as cyclical recoveries go, these results are pretty much from the top drawer.
It's not been all plain sailing. The UK is the company's biggest market, and strength here is offsetting weakness in its European division, as well as a moribund US market.
Savills has been taking action in these areas; after heavy restructuring, the six-monthly loss in Europe has been cut in half to £4 million for the period, while the US office at least has a better deal pipeline than last year.
In contrast, one overseas territory that has really done Savills proud lately is the Asia Pacific region. Transactional fee income there soared by 119% to £44.8 million.
What goes up, may come down
In fact, the only truly bad news in these figures is that management doesn't think they will continue.
Jeremy Helsby, group CEO, thinks the second half will see a slowdown in the Chinese property market, as well as an ongoing lack of credit in the West and persistent concerns over growth:
"Since Q4 2009 we have consistently maintained a cautious outlook for the second half of 2010, and with such uncertainties remaining we currently have no reason to change that view."
Ouch! Helsby's words don't quite amount to a profit warning, but they're not something you'd want to pin next to your PC screen to cheer you up on a wet August day.
Investors certainly took fright at the glass half-empty outlook. The shares fell as much 10% on where they'd sat the previous day, before recovering somewhat to 309p.
What the analysts think
Curiously, analysts seem a little less gloomy than the CEO.
Both Oriel and Numis issued fresh buy recommendations, and they're looking for full-year earnings per share of 14p and nearly 19p respectively. With almost 8p in the bag so far, that means Oriel sees just a slight slowdown while Numis is looking for further growth. The consensus from all analysts is currently 16p for 2010, with the dividend rising to 14p.
So who to believe -- the CEO, the gloomier analysts, or those predicting a forward dividend yield of nearly 5%?
Personally, I'm much more optimistic than most investors I meet, particularly about the prospects of a double-dip recession.
I'd also note that the Chinese property market is notoriously volatile, and that while government efforts to slow it recently are well documented, most onlookers agree it's nipping a problem in the bud rather than precipitating a crash.
Also, Savills is an internationally diversified business, with income coming from across the spectrum, too -- from transactional fees and consultancy earnings to its much less volatile property management business that delivered over a third of the revenues for the half.
What I think
A slowdown in China will undoubtedly take at least a couple of million off the profit figures for the year. But barring a complete meltdown, there's a reasonable chance that other regions can make up the slack.
The company has been opening new residential offices in London, for instance, and the higher end of the UK market where Savills plies its trade should shrug off public sector spending cuts much better than the regions.
Nobody should expect Savills to recapture 2007's earnings high of 46p per share in a hurry, given the subsequent bursting of the credit bubble.
But getting back to 30p or so over a period of, say, five years looks realistic. Assuming 14p for 2010, that's a growth rate of 15 to 20% a year from here, with a 3% yield or more on top.
The current forward P/E of 20 isn't bargain basement, but given Savills' upscale niche, Asian footprint, and its competent performance during the worst property downturn for decades and potential for future growth, the company looks like one to tuck away for the longer term to me.
More from Owain Bennallack:
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