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Urban Logistics' results defy 'shed' bubble fears

Even at this late stage in the market, there is a lot of sense in backing sensible warehouse developers
June 23, 2022
  • Pre-tax profits triple
  • Developer trading at a discount to NAV
IC TIP: Buy

If and when the warehouse bubble does burst, those who exercised a semblance of caution during the boom times will be rewarded. Urban Logistics (SHED) is well aware of this, which is why property director Christopher Turner stresses, during a call about the warehouse developer’s full-year results, that it does not have any fashion tenants in its portfolio and that Amazon (US:AMZN) makes up just 2.5 per cent of its rent roll.

There is a lot of sense to this thinking. Following Amazon’s profit warning and its admission that it had over-expanded in May, many have worried that the cost of living crisis and the subsequent fall in discretionary spending will, in turn, create a fall in demand for logistics space to service ecommerce. This fall in demand has yet to happen, with Savills calculating that the amount of warehouse space being taken on new leases is 36 per cent above the long-term average this quarter and the national warehouse vacancy rate is at a near-record low of 3.1 per cent. But if discretionary spending does continue to drop, Turner believes fashion retailers will be the first to feel the pinch.

These results indicate that this prudence with regards to tenant selection has not been at the expense of growth. Pre-tax profit has risen rapidly since 2020 – surging fivefold in 2021 and then tripling in 2022. However, with industrial land values and warehouse prices rocketing as industrial investment yields plummet to an all-time low of 3.25 per cent, it is hard to see how Urban Logistics can keep up with its current trajectory. Indeed, the company’s own net initial yield has dipped to 4.4 per cent from last year’s 5.2 per cent, meaning that its assets are generating less rental income relative to their price. Meanwhile, its vacancy rate sits at 6.9 per cent, the same as last year, which is more than double the national average.

Still, even if Urban Logistics is unable to scale its profits at the same pace going forward, the company's discount to net asset value seems overdone considering the strength of this year’s figures and its low debt. Turner insists there is still money to be made in corners of the sector if you “roll your sleeves up”. A sensible attitude in a late-stage market where sense is sorely needed. Buy.

Last IC view: Buy, 175p, 12 Nov 2021

URBAN LOGISTICS (SHED)  
ORD PRICE:165pMARKET VALUE:£776mn
TOUCH:162p-165p12-MONTH HIGH:200pLOW: 155p
DIVIDEND YIELD:4.6%TRADING PROP:nil
DISCOUNT TO NAV:-13.0%NET DEBT:-14%
INVESTMENT PROP:£1.03bn   
Year to 31 MarNet asset value (p)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20181249.919.56.3
201913718.722.17.0
20201379.410.07.6
202115247.621.77.6
202218917248.97.6
% change+24+261+125-
Ex-div: 30 Jun   
Payment: 22 Jul