On Tuesday, Morgan Stanley (NYSE:MS) resumed coverage of Segro PLC (LON:SGRO:LN) (OTC: SEGXF) shares, a UK-based real estate investment trust, assigning an Overweight rating to the company's stock with a price target of GBP10.00. The firm's analysis suggests that despite investor disappointment following Segro's first half of 2024 results, there is potential for a positive shift in the stock's valuation.
Segro's estimated rental values saw an increase of 1.4% in the first half of 2024, a slowdown compared to the 6.0% growth in the full year of 2023. Nevertheless, the company's management reaffirmed its rental guidance, with urban assets expected to grow by 3-6% and big box by 2-4%.
Moreover, Segro announced a decrease in its 2024 capital expenditure forecast from £600 million to £500 million, attributing the reduction to delays in securing some expected pre-lets.
This adjustment in capital expenditure has given rise to perceptions of a significant softening in demand. However, Morgan Stanley's analysis indicates that, assuming stable valuation yields and a market rental growth of 3.0-3.5%, Segro's return profile is in line with historical levels that have typically led to the stock trading around its net asset value (NAV) parity.
Morgan Stanley's position reflects an anticipation of a compelling risk-reward scenario for Segro, with considerable room for a re-rating of the stock. This outlook is based on the company's performance and market conditions, despite the tempered growth in rental values and the revised capital expenditure plans.
In other recent news, Segro PLC has been under the scrutiny of financial analysts following the release of its first-half 2024 financial results. Jefferies resumed coverage of the real estate investment trust, issuing a Hold rating and a new price target of GBP8.04. This shift reflects an increased cost of capital for REITs, which has risen year-to-date from 8.1% to 10%, and the equity cost of capital from 9.3% to 11.9%.
Meanwhile, JPMorgan (NYSE:JPM) has raised its price target for Segro to GBP10.50, maintaining an Overweight rating, suggesting a 42% upside potential. In contrast, UBS downgraded Segro's stock from Buy to Neutral, adjusting the price target to 985 pence, influenced by slower-than-expected growth in estimated rental value and a rise in portfolio vacancy.
In addition, Citi has increased its price target for Segro from £10.69 to £11.49, maintaining a Buy rating. The firm anticipates a 53% rise in earnings per share from 2023 to 2028, potentially contributing to a 35% increase in the value of the company's property portfolio. These are recent developments that investors should consider.
InvestingPro Insights
To complement Morgan Stanley's analysis, recent data from InvestingPro provides additional context for Segro PLC's financial position. Despite the company not being profitable over the last twelve months, InvestingPro Tips suggest that net income is expected to grow this year, and analysts predict the company will return to profitability. This aligns with Morgan Stanley's positive outlook on the stock's potential for re-rating.
Segro's financial stability is underscored by its dividend history, with InvestingPro Tips highlighting that the company has maintained dividend payments for 45 consecutive years and has raised its dividend for 10 consecutive years. This consistent dividend policy may appeal to income-focused investors, especially in light of the current market conditions.
The company's Price to Book ratio of 0.89, as reported by InvestingPro, suggests that Segro is trading below its book value, which could indicate potential undervaluation—a point that resonates with Morgan Stanley's Overweight rating. Moreover, Segro's strong liquidity position, with liquid assets exceeding short-term obligations, provides financial flexibility in the current economic environment.
For investors seeking a more comprehensive analysis, InvestingPro offers 5 additional tips that could provide further insights into Segro's investment potential.
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