Mega-trend propels Segro to post-crisis high

A decade after the Credit Crunch chaos, the shares are up over 400% and just keep rising.

Warehousing continues to deliver for investors in the FTSE 100 index after Segro (LSE:SGRO) showed today it is still reaping benefits from the mega-trends of e-commerce and urbanisation.

Shares are at their highest level since the financial crisis in 2008 after a stunning run of form in which Segro has added more than a third to its market value so far this year.

At a time when the wider real estate sector is under pressure from economic conditions, Segro's portfolio of warehouse and industrial properties in the UK and continental Europe is seen by analysts as an attractive play on e-commerce disruption.

Its warehouses are located close to major cities and are used by customers including retailers, supermarkets and parcel delivery firms for urban distribution. The remaining third of its estate is made up of 'big box' warehouses serving national and international logistics supply chains. 

In today's third quarter update, Segro said it had achieved another period of strong operational delivery with £15.3 million of contracts signed, new rents 20% higher than the previous passing and vacancy rates stable and low at 4.9%.

Investing in this kind of growth comes at a price, which is why shares slipped back 1% to 815p following today's update. Analysts at Morgan Stanley, however, still think the real estate investment trust (REIT) has the potential to reach 870p, which would be a 9% premium to the 2020 forecast for net asset value.

The broker added that Segro looked to be a scarce play on the type of logistics with superior rental growth potential:

"We are bullish on logistics, and we see Segro as a play on that theme."

Source: TradingView Past performance is not a guide to future performance

Brexit uncertainty and the threat of a eurozone slowdown pose the biggest risks to progress, but in the meantime CEO David Sleath said the company was moving into the final part of the year with confidence.

He said:

"The combination of new rental income from the development programme, compounded with the benefits from active asset management of our existing portfolio, should enable us to drive sustainable growth in both earnings and dividends."

For investors, Segro offers an inflation-beating dividend yield of around 2.5%, well covered by earnings, emanating from its steady flow of rental payments.

Its prime warehouse portfolio and active management approach should ensure that the REIT is well placed to grow rents and maintain high occupancy levels across its markets. Customers are signed up to 63% of its developments under construction.

Segro today reported a pick-up in pre-let development agreements to £7.7 million in the quarter, including with online food retailer Ocado in East London and home improvements retailer Leroy Merlin near Rome. At the end of September, there was 644,000 sq m of space under construction, equating to potential future headline rent of £46 million.

It remains on course to invest around £600 million in its development pipeline, including land, infrastructure and construction, across 2019 as a whole.