The Savills (LSE:SVS) share price reached a new all-time high this week following the release of its latest results. This newest jump seems to be a continuation of the upward trajectory this stock has been on since the start of the year. And over the last 12 months, it’s up by nearly 60%. Let’s take a closer look at what’s behind this growth. And whether I should be considering this business for my portfolio.
The rising Savills share price
Savills is a high-end real-estate services business. In other words, it helps wealthy individuals and companies find and buy properties. The firm released its half-year earnings report this week. And, in my opinion, it was pretty impressive.
Revenue grew by double-digits reaching £932.6m in the last six months. That’s not bad. But the truly impressive result was the underlying profit growth. Pre-tax profits surged from £7.7m in 2020 to £63.8m this year. That’s more than a 700% boost.
This explosive growth appears to be primarily caused by rising house prices. On average, the value of the properties sold by Savills in 2020 stood at around £1.2m. This year, it’s closer to £1.9m. And that’s despite the fact that finding international buyers for London new-build properties has been challenging due to the travel restrictions caused by the pandemic. Meanwhile, its international commercial operations also performed admirably. So, seeing the Savills share price surge on this report seems perfectly understandable to me.
The risks that lie ahead
Seeing this level of growth is undoubtedly encouraging, especially since there were valid concerns of a sales slump due to the pandemic. However, Covid-19 still took a toll. With lockdown restrictions ravaging the economy in early 2020, the firm needed to raise capital. And it borrowed money.
As a result, total debt and equivalents have risen considerably to £657m as of June this year. This, in turn, has caused interest payments to rise. With the assets on the balance sheet, and profitability returning swiftly, these outstanding loans look manageable. But they are applying pressure to the bottom line that could impact the Savills share price over the long term.
What’s more, this pressure may start to increase in the near future. As inflation is on the rise, there is growing uncertainty regarding the potential for an interest rate hike. Suppose this were to happen. Apart from making the cost of debt more expensive, it may result in reduced demand from customers. After all, even a slight percentage increase can have a substantial effect on a million-pound mortgage.
The bottom line
Overall, it seems the worst has finally passed for Savills, and its rising share price is reflecting that. With lockdown and travel restrictions beginning to ease, I believe its revenue, and subsequently its profits, can return to pre-pandemic levels.
With dividends now reinstated, I think the potential reward is worth the risks. Therefore, I would consider adding this business to my income portfolio today.
