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Segro still engaged in an underserved market (for now)

Supply-demand dynamics are still working in the Reit's favour
February 18, 2022
  • Record rental growth 
  • Modest vacancy rate

Judging by Segro’s (SGRO) full-year figures, consumer behaviour may have been permanently altered by the pandemic. True, the swing to ecommerce channels is nothing new, but the trust’s chief executive, David Sleath, declared that “supply-demand dynamics in the industrial and logistics sector remain very favourable”. If anything, that may even seem a little understated given a £4.1bn portfolio valuation uplift and record levels of rental growth.

The scope and market penetration of ecommerce is also expanding. Segro notes that rapid grocery delivery services are gaining in prominence, as part of a gathering trend towards so-called ‘q-commerce’, with speed of delivery the main hallmark. Many of the companies engaged in this type of consumer fulfilment (a ghastly term) utilise ‘dark stores’, essentially strategically located warehouses to ensure a rapid turnaround from order to delivery.

So much for the UK high street. Still, you probably won’t be complaining if you happen to have a stake in Segro, given a year of record levels of warehouse take-up across Europe. Rent roll growth, which reflects adjusted net headline rent from existing space, increased to £72mn, from £60mn in the prior year. Optimisation has driven financial performance with the vacancy rate at a modest 3.2 per cent, down 70 basis points year on year and at the bottom end of the target range. The customer retention rate came in at 77 per cent, although management noted that Segro had taken back space for redevelopment and reletting to capture market rental growth. In addition, the portfolio’s weighted average lease length and the level of incentives agreed for new leases were broadly in line with 2020.

In all, Segro forked out almost £2bn in development capital, asset and land acquisition, partly offset by £515mn in disposals. Looking ahead, several pre-let projects are close to being approved, probably within the second half of 2022. They account for approximately £271mn of additional capital expenditure and £20mn of additional rent.

FactSet data indicate that funds from operations as a proportion of net assets are expected to increase through the current year, while the share price premium has narrowed. Metrics aside, Segro’s growth prospects are underpinned by the fact that distribution networks on continental Europe are struggling to keep pace with the expansion of ecommerce volumes. The UK is ahead of the curve in this regard, yet domestic retailers also require “additional space to successfully handle ecommerce penetration rates approaching 30 per cent”. However, we feel the group’s potential is adequately reflected in the share price, especially given that real industry rental returns are imperilled in an inflationary environment. Hold.

Last IC view: Hold, 1,190p, 29 Jul 2021

SEGRO (SGRO)   
ORD PRICE:1,297pMARKET VALUE:£15.6bn
TOUCH:1,295-1,297p12-MONTH HIGH:1,508pLOW: 870p
DIVIDEND YIELD:0.6%TRADING PROP:£45mn
PREMIUM TO NAV:16.0%   
INVESTMENT PROP:£15.5bn*NET DEBT:25%
Half-year to 31 DecNet asset value (p)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20175540.9898.516.6
20186481.1010518.8
20197000.9079.320.7
20208111.4612422.1
202111184.3633924.3
% change+102+344+244+46
Ex-div:17 Mar   
Payment:4 May   
*Includes investments of £1.795bn in joint ventures