ii view: warehouse owner Segro profits from web boom

Exposure to ecommerce demand and operations in both the UK and Europe. We assess prospects.

Third-quarter trading update to 19 October

• £26 million of new headline rent signed, up from £16 million in Q3 2020
• Vacancy rate of 3.2%, down from 4.3% at the end of June

Chief executive David Sleath said: 

“Segro has had an active and successful third quarter as we continue to capitalise on strong occupier and investment market conditions, with high leasing volumes across the business.

“We head into the final months of 2021 with confidence in our ability to drive further sustainable growth in rental income, earnings and dividends.”

ii round-up:

Warehouse and industrial property owner Segro (LSE:SGRO) today detailed £26 million of new headline rents in the third-quarter period from the 1 July to 19 October.

That’s up from £16 million in the third quarter last year and takes the year-to-date total to £64 million from £50 million this time last year. 

Segro shares retreated by around 1.5% in afternoon UK trading, having gained over 80% since pandemic induced market low back in March 2020. Shares for office and retail outlet owners Land Securities (LSE:LAND) and British Land (LSE:BLND) are by under 45% over that time. 

Segro owns or manages just over eight million square metres (88 million square feet) of space in the UK and parts of Continental Europe. Around two-thirds of its portfolio is in urban warehouses, properties boost by ecommerce demand under the pandemic.  Its tenants include Sainsbury (LSE:SBRY), Amazon (NASDAQ:AMZN) and Tesco (LSE:TSCO)-owned Booker. 

Vacancy rates fell to 3.2% during the period, down from an already low 4.3% at the end of June. This was largely due to the take-up of recently completed speculatively developed space.

The FTSE 100 company currently has one million square metres of space under construction and has recently added to its landbank to extend its opportunities for future development. 

Previously announced first-half adjusted net asset value rose by 12% to 909p per share, helping it to hike its interim dividend pay-out by 7% year-over-year to 7.4p per share. 

ii view:

An owner and developer of urban warehousing and light industrial property, Segro’s properties are spread between the Slough Trading estate, Heathrow, Park Royal and the Midlands. Almost 30% of its turnover is generated in Europe, principally France, Germany, Poland and Italy. 

For investors, a share price of around 1,280p per share compares to its half-year net asset value of 909p per share, leaving them trading at a premium and suggesting the shares are not obviously cheap. A forecast dividend yield of just under 2% also compares to 3% at warehouse rival owner Tritax Big Box (LSE:BBOX) and more than 4% for office owner Land Securities. 

But the structural themes of e-commerce and urbanisation continue to underpin occupier demand. Covid-19, despite some early tenant challenges, has underlined the importance of supply chains, while exposure to potential growth in European online demand also needs to be remembered. For now, and given likely ongoing growth in ecommerce, Segro shares look to remain worthy of long-term investor support. 

Positives: 

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

Negatives:

• Some tenants did suffer Covid-19 disruption
• Valuation: trades at a premium to net asset value

The average rating of stock market analysts:

Buy