Segro (SGRO) was, until recently, the stock that the real-estate recovery left behind. A £2.4bn debt pile, hefty property write-downs and the failure of a major tenant held the industrial specialist back last year, even as the big office and retail players were dramatically rerated. A shock profit warning in January seemed to confirm the company's reputation as a value trap.
- 4.7 per cent well-covered dividend yield
- Geared into UK and European recovery
- E-commerce should drive growth
- Low risk development pipeline
- Ongoing restructuring programme
- Shares trade at a premium after a strong year
But January turned out to be the darkest hour before dawn. The shares are up 27 per cent year-to-date - well ahead of the other large real-estate investment trusts - and now trade on a 3 per cent premium to forecasts for year-end adjusted book value. We would not normally recommend buying shares at a premium, but Segro's property portfolio has been written down so far, even as its dividends have remained both generous and generously covered, that we believe the shares offer value.
The company was set up in the 1920s to develop the Slough Trading Estate (Segro is an acronym of Slough Estates Group, a former corporate name). This is still its largest single asset, worth about £1bn, and the site of its headquarters. Yet it has since diversified into other industrial property types, including "big-box" warehouses - typically single-let distribution hubs for national retailers - and so-called urban logistics - smaller metropolitan sites that are popular with parcel companies. The portfolio also sprawled onto the continent in the years before the credit crunch.
This sheer diversity of property type and location makes Segro a useful play on the Northern European economy. The company's vacancy rate at the end of June was 9.5 per cent, so the company has substantial scope to increase profits simply by letting out existing space as production and consumption gradually pick up.
SEGRO (SGRO) | ||||
|---|---|---|---|---|
| ORD PRICE: | 313p | MARKET VALUE: | £2.3bn | |
| TOUCH: | 312-313p | 12-MONTHHIGH: | 321p | LOW: 221p |
| FWD DIVIDEND YIELD: | 4.8% | TRADING PROP: | £1.2bn | |
| DISCOUNT TO FWD NAV: | 1% | |||
| INVESTMENT PROP: | £3.2bn | NET DEBT: | 97% | |
| Year to 31 Dec | Net asset value (p) | Pre-tax profit* (£m) | Earnings per share* (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 366 | 127 | 17.1 | 14.3 |
| 2011 | 345 | 139 | 18.4 | 14.8 |
| 2012 | 302 | 145 | 19.3 | 14.8 |
| 2013* | 304 | 127 | 17.2 | 14.8 |
| 2014* | 316 | 122 | 16.1 | 15.0 |
| % change | +4 | -4 | -6 | +1 |
Normal market size: 10,000 Matched bargain trading Beta: 1.2 *Investec forecasts; underlying EPS and PTP figures | ||||
Property values are also now more likely to rise than fall. Segro's portfolio was marked up in the first half of 2013 for the first time since the 2010 bounce - albeit by only 0.3 per cent. As the risks associated with the UK and wider European economy recede, the gains should strengthen. Some big investors, notably the Norwegian sovereign wealth fund and the US private equity giant Blackstone, have made high-profile moves into European industrial property this year, and in time, smaller institutions are likely to follow.
Rising market confidence should help Segro ditch the £560m of lower quality properties it still has ear-marked for sale from the £1.6bn "non-core" assets that were identified in the strategic review that followed a change of chief executive in April 2011. These assets were largely responsible for last year's aggressive property write-downs. Yet the restructuring process has been reasonably swift and buyers should now be easier to find.
The industrial sector has a reputation for offering investors buckets of cash but little growth. This is because there is no great shortage of land in convenient locations for logistics or industry, so growing demand is usually met by development, checking rental growth. Yet for some assets this may change and Segro is well positioned to benefit. E-commerce is driving intense demand for sheds in space-constrained urban locations. With roughly £600m of assets at Park Royal and Greenford in London, Segro has substantial exposure to this sector. It let about 30,000 square feet of space to parcel companies like DHL and UPS in the first half, for example.
Outside of urban locations, the company is more likely to generate growth the old-fashioned way - by building new sheds. It currently has 14 projects worth an expected £10.3m in annual rent on the go. With 71 per cent of the income already secured through pre-let agreements, these carry limited risk and should boost profits.
