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On Monday, HSBC analysts adjusted their stance on Segro PLC (LON:SGRO:LN) (OTC: SEGXF), downgrading the stock from Buy to Hold and revising the price target downward to GBP6.85 from the previous GBP9.77. The revision comes amid concerns over the company’s ability to continue driving rent growth at its properties. According to InvestingPro data, while the company maintains a solid financial health score and has maintained dividend payments for 45 consecutive years, analysts anticipate a sales decline in the current year.
Tom Musson of HSBC highlighted the challenges faced by Segro in the current business environment, noting the difficulty in achieving significant rental increases due to rising market supply and higher vacancy levels. Over the past ten years, Prime London and South East Industrial Estimated Rental Values (ERVs) have seen substantial growth, outpacing UK Consumer Price Index (CPI) increases. However, this trend is showing signs of moderation. InvestingPro analysis reveals the company maintains strong fundamentals with a current ratio of 1.3 and liquid assets exceeding short-term obligations.
The analyst pointed out that while Segro has enjoyed an average increase of 113% in ERVs over the last decade, representing a compound annual growth rate (CAGR) of 7.8%, this has significantly outstripped the UK CPI, which grew by 35% or 3.1% CAGR during the same period. Despite this historical performance, the outlook for rental growth is becoming more subdued. With a market capitalization of $11.6 billion and a robust gross profit margin of 82%, detailed financial analysis available through InvestingPro suggests the company maintains strong operational efficiency despite current challenges.
HSBC anticipates that Segro will still achieve competitive levels of ERV growth compared to other subsectors, but it expects this growth to continue to moderate, projecting an increase of 3.7% for 2025 and 3.4% for 2026. These projections take into account the weaker business environment and the resulting impact on Segro’s negotiating position in rental discussions.
The downgrade and price target adjustment by HSBC reflect a recalibration of expectations for Segro’s financial performance in the face of a changing real estate market. The company’s stock rating and future outlook have been adjusted accordingly to align with these new market conditions.
In other recent news, Segro PLC, a UK-based real estate investment trust, has been the subject of several analyst adjustments following the release of its first-half 2024 financial results. Morgan Stanley (NYSE:MS) resumed coverage of Segro, assigning an Overweight rating with a price target of GBP10.00, indicating potential for a positive shift in the stock’s valuation despite the company’s tempered growth in rental values and revised capital expenditure plans.
In contrast, Jefferies issued a Hold rating for Segro with a new price target of GBP8.04, reflecting an increased cost of capital for REITs. Meanwhile, JPMorgan raised its price target for Segro to GBP10.50, maintaining an Overweight rating, while UBS downgraded Segro’s stock from Buy to Neutral, adjusting the price target to 985 pence.
Citi has also increased its price target for Segro from £10.69 to £11.49, maintaining a Buy rating, anticipating a 53% rise in earnings per share from 2023 to 2028. These recent developments follow Segro’s announcement of a decrease in its 2024 capital expenditure forecast from £600 million to £500 million, and a slowdown in its estimated rental values growth to 1.4% in the first half of 2024. These are recent developments that investors should consider.
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