The Segro (LSE: SGRO) share price has slumped since late 2021, though it’s still up over the past five years.
The Real Estate Investment Trust (REIT) invests in the kind of commercial warehouse properties that are in big demand for e-commerce. And it seems that led to a bit of a bubble in the Covid days.
Looking at FY 2023 results, I think the market’s got the Segro share price wrong. I think it’s cheap.
Growth in rents
Despite the tough economy, CEO David Sleath said: “Significant rental uplifts on the standing portfolio and our profitable development programme have driven further growth in both earnings and dividends.“
The firm lifted the full-year dividend by 5.7%. That’s above inflation, even at the current rate.
There was a statutory loss before tax, but we saw a 6% rise in adjusted profit before tax, to £409m.
Segro’s portfolio valuation dropped by 4%. But in today’s property market, I don’t think that’s too bad.
Future growth
Broker forecasts show strong earnings growth in the next few years, which could drop the stock’s price-to-earnings (P/E) ratio as low as eight by 2025.
And if the board’s ambitions come good, it sounds like the revenue should be there to achieve it.
The CEO added: “In the next three years we expect to increase our passing rents by more than fifty per cent.” That will be good if it comes off, but might it be just a bit too optimistic?
Tough economy
I can see a fair number of Segro’s tenants still under pressure in the next couple of years. The UK economy tipped into recession in 2023. And we really don’t yet know how things will look as we come out of it.
I’m also wary when I hear company bosses talking of such upbeat plans. If the firm doesn’t quite manage to live up to them, investors could dump the stock. That can happen even if a firm still does well, but doesn’t quite hit the heights we’d hoped.
REIT time
Saying that, I do think there are some pretty good REIT buys out there now. Anything related to property is very uncertain. And that’s especially true of commercial real estate.
And where there’s uncertainty, there are cheap shares for us to buy.
I have my eye on a couple of other REITs, with Primary Health Properties high on my list. There’s a 7.5% dividend yield on offer there. And the healthcare business surely provides a fair bit of safety.
I like Tritax Big Box too, for the same reasons as Segro. It’s also in the warehouse segment, and counts Amazon, Morrisons, Tesco and Ocado among its clients.
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Diversity
Anyway, back to Segro. One thing I do like is summed up in the firm’s outlook update. It speaks of having “one of the highest quality, best located and most modern pan-European industrial warehouse portfolios, with a diverse customer base“.
I think that diversity adds a bit to the stock’s safety too. I want to buy a REIT this year, and it might be Segro.
