ii view: is Segro’s discount valuation a buying opportunity?

Shares in this owner of warehouses used for e-commerce distribution have fallen by more than a third over the last year. We assess prospects.

Full-year results to 31 December

• Adjusted pre-tax profit up 8.4% to £386 million
• Adjusted Net Asset Value (NAV) per share down 15% to 966p
• Final dividend up 7.7% to 18.2p per share
• Total dividend for the year up 8.2% to 26.3p per share
• Net debt up 37% to £5.69 billion

Chief executive David Sleath said: 

“Segro is today reporting strong operational results for 2022, including a record level of rent roll growth driven by our active asset management and a strong leasing performance. Our modern, well-located and highly sustainable warehouses continue to be in high demand from a diverse range of occupiers, underpinned by long-term structural drivers.”

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ii round-up:

Warehouse and industrial property owner Segro (LSE:SGRO) today detailed full-year 2022 results broadly in line with City forecasts. 

Net rental income rose 19% to £522 million, helping push adjusted pre-tax profit up 8.4% to £386 million. Strong occupier demand left new headline rent commitments at a record £98 million, up from last year’s £95 million, all of which underpinned an 8.2% hike in the total annual dividend payment to 26.3p per share.

Segro shares climbed by more than 3% in UK trading having come into this latest announcement down by more than a third over the last year. Rival warehouse owner Tritax Big Box Ord (LSE:BBOX) is down by a similar amount, while GP surgery property owner Primary Health Properties (LSE:PHP) is down by almost a fifth. 

Segro owns or manages over nine million square metres (106 million square feet) of space in the UK and parts of Continental Europe. Its properties are located in and around major cities and at key transportation hubs in the UK and in seven other European countries. Its tenants include Bunzl (LSE:BNZL), Amazon (NASDAQ:AMZN), Ocado Group (LSE:OCDO), Sainsbury (J) (LSE:SBRY)and Howden Joinery Group (LSE:HWDN).

Overshadowed by generally rising global interest rates and exaggerated by the UK’s failed autumn mini-budget, the value of its properties has retreated by 11% to £17.93 billion, taking the adjusted Net Asset Value (NAV) per share down 15% to 966p per share.  

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Accompanying management outlook comments pointed to early signs of liquidity returning to investment markets as investors see value at current levels of pricing.

Broker UBS questioned whether the sharp fall in the NAV was now old news, reiterating its ‘buy’ stance on the shares. Its price target of 925p is based on a 1% premium to net tangible assets compared with the current 13% discount.

A first-quarter trading update is scheduled for 20 April. 

ii view:

FTSE 100 company Segro owns and develops urban warehousing and light industrial property.  Segro's assets are spread across the Slough Trading estate, Heathrow, Park Royal and the Midlands. Around 30% of its turnover is generated in Europe, with properties in France, Germany and Poland. 

Of its more than 1,400 tenants, no single tenant accounts for more than 7% of its total headline rent. Around a fifth of its rents come from retail tenants such as Ikea, a further fifth from transport and logistic customers like DHL, with the balance spread across areas including manufacturing, wholesale distribution and parcel delivery operators.

For investors, the highly uncertain economic outlook, including rising interest rates, continues to overshadow property prices generally, while the forecast dividend yield of around 3% is below more office focussed rivals like Land Securities Group (LSE:LAND) at over 5%.

On the upside, the share price at around 835p now trades at a discount to the current adjusted NAV of 966p as opposed to a previous premium. Structural themes of e-commerce and urbanisation also continue to underpin occupier demand, the annual dividend payment has risen for more than five consecutive years fuelled by rising rental income, while potential to expand its property portfolio in Europe should also not be forgotten.  

In all, and despite continued interest rate and economic outlook uncertainty, this giant of the property sector looks to remain worthy of consideration for investors building a diversified portfolio.

Positives: 

• Diversity of both customer or tenant type and geographical location
• Over five years of consecutive dividend growth

Negatives:

• Uncertain interest rate outlook
• Rising group net debt

The average rating of stock market analysts:

Strong hold