Segro’s valuation tailwind

Making an accurate assessment of Segro’s (SGRO) prospects is tricky at the best of times but huge unrealised valuation gains of £1.2bn on its portfolio of investment properties made the task harder than normal. The REIT clearly benefited from its focus on warehouses and commercial business developments during the pandemic as suppliers upped their stocking and capacity to meet challenges in the supply chain. To put that into context, the figure for the 2020 comparison was just £57m.

It will be interesting to see in which direction Segro goes with its development pipeline given the extraordinary circumstances underpinning the valuations of its warehouse estate. Post-period end, the company recently sold 6 Italian warehouse properties for €127.5m (£108m), taking advantage of the boom in e-commerce and the resulting need for large amounts of storage space. The space was developed in a joint venture with Italian company Vailog. The trend is certainly clear in most European countries. According to recent research, in the UK alone, Amazon has snapped up more than 25 per cent of leases on available warehousing.

The company also benefited from some clearly favourable rent reviews as rental income from trading and investment properties spiked by nearly £30m to £190m. The balance sheet held few surprises with net assets up from a year ago and cash down by around 12 per cent since the year-end, though the company successfully extended the maturity on its €1.2bn revolving credit facility for another year to 2026.

Segro has been an inadvertent beneficiary of the internet economy’s largesse, combined with an acceleration of existing e-commerce trends, which explains the forward P/E for next year of nearly 30. That is rich by any standards and it would unsurprising if investors did not start cashing in profits. Hold.

Last IC view: Buy, 976p, 19 Feb 2021