Cube Midcap Report (16 Oct 2019) – #SGRO

Cube Midcap Report (16 Oct 2019) – #SGRO

Hi again! I’m back with a short Midcap Report for today.

Today, we had news from:


Segro (SGRO)

  • Share price: 814.6p (-0.9%)
  • Market cap: £8,933 million

Trading update

This giant REIT, owning warehouses and industrial properties across the UK and Europe, has been a solid performer for investors.

Or at least that’s true since the financial crisis – in 2007, the share price peaked around £10.90. It then suffered three years of losses, and suffered a major share price collapse. But it has been recovering nicely in recent years:

The company, previously known as Slough Estates, has a portfolio valued at £9.9 billion and net borrowings of £1.8 billion (as of June 2019). The net asset value per share on the same date was 665p or 673p, depending on how you measure it (using IFRS accounting standards or the EPRA NAV method).

So it’s not hard to see that the shares are currently trading at a material premium to the official net asset value. Warehouses are clearly considered more robust in this economy than shopping outlets – consider how the market is pricing NewRiver REIT (NRR) and especially Intu (INTU).

Segro has today issued a trading update for the period from July to mid-October. The rental picture is a bit mixed:

  • Progress on rent roll growth is a bit slower than last year. The aggregate value of new “headline” rents (excluding rent-free periods) is lagging, year-to-date, compared to 2018.
  • On the other hand, the rent roll growth from existing space is still up, compared to 2018.

Upward pressure on London rents is supporting the so-called “reversionary potential” in Segro’s portfolio. I note that this is in stark contrast to the casual dining and retail sectors!

Indeed, Segro is enjoying increases of 20% on review and renewal of rents versus the previous passing rent, “reflecting a strong contribution from the Slough Trading Estate and in our Greater London portfolio”.

Vacancy rates are up slightly at 4.9% (4.8% at the end of June).

Some interesting tenants are named in relation to new developments: Ocado (OCDO), Leroy Merlin in Rome and TERG (trading as Media Expert) in Poland.

The pipeline of space under construction is expected to boost headline rent by £46 million, which is more than 10% of the company’s entire headline rent as of June.

My view

This REIT seems to be in a sweet spot in terms of sector positioning, and a low LTV ratio of 24% (June 2019) can give investors comfort that it’s not over-stretched during these rather nerve-wracking economic conditions.

The premium to NAV reflects these factors, and the dividend yield is somewhat compressed at just 2.4% trailing (2.6% forward).

For risk-averse, income-seeking investors who are content with this sort of yield, Segro may be of interest. Personally, I’ll be hungry for a greater prospective return than this seems to offer!


Sorry this was a bit shorter than usual. I’ll be back tomorrow morning with midcap analysis!

Cheers,

Graham

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