FTSE 100 real estate investment trust Segro (LSE: SGRO) has enjoyed a blistering five years, its share price rising 113% in that time, roughly 10 times the growth of the FTSE 100 over the same period.
Segro growth slows
It is down 1.5% today on publication of its trading update covering 1 January to 16 April, which showed a slowdown in new headline rent growth and secured new pre-lets, although chief executive David Sleath said the business continued to perform well during its first quarter.
New headline rents totalled £21.2m, down from £27.3m in the first quarter of 2018, while secured new pre-lets slipped from £23.3m to £11.1m over the same period (although they remain well above the three-year quarterly average run rate of £7m).
Lease it out
Sleath hailed “particularly strong” rent roll growth at £6m, up from £500,000, boosted by the re-gearing of a number of leases in its Heathrow portfolio. The group now has 44 projects under construction, which are expected to generate £57m of annualised rent and are already 72% leased.
Segro raised £451m of equity in February to add to its future development pipeline, while it has a number of additional pre-let development projects at advanced stages of negotiation. Sleath said the group’s high-quality portfolio of assets in prime locations across the UK and continental Europe should “continue to benefit from the structural drivers of e-commerce and urbanisation,” despite macroeconomic and political risks.
Healthy pipeline
With vacancy rates falling to 4.4% (against 5.2% in December), lettings of both existing and recently completed speculative space are strong. Segro completed 100,000 square metres of developments in the quarter, capable of generating £3.8m of headline rent when fully let, with £2.8m already secured.
So why was the market response downbeat? I reckon it’s partly down to the high valuation, with the stock trading at 28.4 times earnings. Paul Summers identified the same problem in February. Also, the yield disappoints at 2.9%, covered 1.2 times, although management policy is progressive. Segro is a good business, but it doesn’t look a great investment at today’s price.
That’s the spirit
That said, a toppy valuation and low yield does not necessarily make a stock a no-go area. You only have to look at FTSE 100 listed spirits giant Diageo (LSE: DGE) to counter that. Its P/E is routinely in the mid-20s, while its income rarely rises above 2.5%. It is the same story today, as the stock trades on a forecast valuation of 24.5 times earnings while the forecast yield is just 2.2%, with cover of 1.9.
You may have to be patient if you want a better entry point. Diageo is expensive because investors like it, and it usually lives up to expectations.
After a spell in the doldrums, Diageo is up 60% over the past three years. It has also beaten the FTSE 100 with ease and Peter Stephens reckons it will continue to do so, citing strong growth prospects in China and India. EPS are expected to rise 9% this financial year and 7% next year, which is more than steady, and offers security against wider stock market jitters. This is exactly the type of stock you should be looking to buy amid a wider market correction.
