Investors shouldn't sell Segro for short-term gain
Prologis's bid for Segro marks another milestone in the London Stock Exchange's decline. Its departure would be a dismal outcome for the UK, says Max King
Segro's roots go back over 100 years. In 1920, Noel Mobbs led a consortium to buy 1.8 million square feet of workshops and 17,000 vehicles on a 600-acre site west of London. It had been a depot for the disposal of vehicles no longer needed by the army, but after disposing of the stock – which took five years – the new owners decided to turn the site into an industrial estate called the Slough Estate.
The venture attracted businesses including Mars, Gillette, Johnson & Johnson and Citroen, some of which are still there. The company diversified away from Slough but the Mobbs family remained involved into the 1980s.
The company's assets expanded across the UK and Europe and it rebranded as Segro (LSE: SGRO) in 2007. Yet industrial property was the Cinderella of the wider sector, less popular with investors than office and retail property. The advent of logistics warehouses and data centres changed that and Segro became the hottest stock in the sector. The shares rose above 1,400p in 2021 and traded at a significant premium to net asset value (NAV).
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But over the next four years, the price halved amid rising interest rates. The shares fell to a discount to NAV, which had itself dropped by more than a quarter. In mid June, the shares stood at under 750p. Then Segro became the latest UK property company to receive an unsolicited bid. US logistics giant Prologis (NYSE: PLD) has proposed an all-share deal valuing Segro at a little above NAV. Segro's board says this is “opportunistic” given “the highly attractive underlying business and strong prospects”.
Segro is operating in a shunned sector
Marcus Phayre-Mudge, manager of the £1 billion TR Property Trust (LSE: TRY) had avoided the shares but rebuilt a holding in the last year. In his latest webinar, he listed 16 takeover bids by other listed companies and 16 by private equity across Europe to illustrate the attractiveness of the sector to corporate buyers at a time when investors have been shunning it.
“There is very little oversupply, rental growth is coming through and there is no speculative development,” he says, “the opposite of the early 1990s and before the financial crisis.” In addition, “a huge rise in costs means a low level of construction and an undersupply of prime space.” The weighted average discount to NAV in the sector is over 30%. This is below the peak discount of 45% in 2022, but still in the cheapest quartile since 1990.
To capitalise on this, TRY has geared up: borrowings equal 17.6% of net assets, close to its maximum of 20%.
The sector is still waiting for an upturn
A sector upturn is far from certain. Property faces many challenges. Population growth across Europe is, at best, static. Retailing continues to move online. Demand for office space is restricted to prime locations. The rush to build logistics hubs has abated. Student housing is a mature market. Leases have become shorter. Buildings become obsolete faster than ever, requiring expensive refurbishment or rebuilding.
TRY – which currently has 35% in the UK and 65% in Europe – has seen NAV fall 7% over five years, while the shares are down 8%. However, it has outperformed its benchmark in 14 of the last 15 years. A 32% gain over three years suggests an upturn, but performance has been flat over one year.
Still, a 9% discount to net NAV and a dividend yield over 5% means investors are paid to wait. Phayre-Mudge and his team continue to find niches of undervaluation, opportunity and growth. Consolidation will make the sector “more attractive to wealth managers who struggle to justify large positions in sub-£500 million companies”, he says.
That does not apply to Segro with a market value of £12 billion. This bid marks another milestone in the endless contraction of the London Stock Exchange. Its departure would be a short-term gain for investors, including TRY, but a dismal outcome for the UK.
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