Segro offers attractive entry point after data centre deal

A £1 billion data centre capable of handling next-generation cloud and AI workloads today put Segro (LSE:SGRO) back in sight of FTSE 100 investors following a poor run for shares.

The urban warehouse business led the blue-chip index after it announced a joint venture (JV) plan to develop its first fully fitted data centre on land it owns in Park Royal, west London.

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A shortage of competing land supply and limited power capacity means the scheme is expected to be attractive to global hyperscalers — such as Amazon Web Services or Microsoft — as they look to grow their capacity in one of Europe’s largest data centre markets.

Until now, Segro has focused on enabling this critical infrastructure through powered shell warehouses on the Slough Trading Estate. There are now 31 data centres, the largest cluster in Europe with a headline rent of £55 million accounting for 8% of the group’s total.

Boosted by a land bank featuring 2.3 gigawatts of power capacity, chief executive David Sleath has been looking at ways to maximise the opportunity in this fast-growing sector.

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He said the Park Royal joint venture partner Pure Data Centres Group had an excellent track record of delivering world-class facilities to global hyperscalers.

Sleath added: “We expect this project to deliver an attractive risk-adjusted return and it will also help further strengthen Segro expertise in this area, enabling us to optimise and accelerate the significant value creation opportunity within our portfolio.”

Source: TradingView. Past performance is not a guide to future performance.

In addition to contributing land, Segro’s cash equity contribution to the joint venture is expected to be around £150 million over the total construction period. The fitout prior to a potential opening in 2029 will include power distribution, cabling and cooling systems.

The project, which is expected to deliver a net yield on cost of 9-10%, helped Segro shares to rise 26.4p to 717.4p by midday. That’s still more than a fifth lower than in July.

Segro’s portfolio includes both urban and big box warehouses, with its five biggest customers being Amazon.com Inc (NASDAQ:AMZN), Deutsche Post AG (XETRA:DHL), data centres business Virtus, Royal Mail (International Distribution Services (LSE:IDS)) and FedEx Corp (NYSE:FDX). About 65% of its estate by value is in the UK.

Segro’s stock market valuation decline followed a £900 million fundraising move in February 2024, when it bolstered its firepower for growth opportunities with the placing of 111 million new shares or 9% of existing capital at a price of 820p.

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Upgrading to a Buy recommendation earlier this month, UBS said: “When sentiment towards the occupational market turned, it turned fast, and combined with the rise in gilt yields, Segro sold off by 26% from 2024 peaks and ahead of the market.

“But we think the short-term challenges are more than priced in and now represent an attractive entry point.”

It highlighted very strong sentiment towards logistics from private market buyers, as well as the “almost forgotten data centre story”.

UBS said its analysis indicated a single fully fitted data centre asset in a JV structure could deliver a 61% IRR (rate of return).

The bank added: “When we factor these cash flows into our model it suggests we could see up to £841 million of additional development profit and earnings per share 5-8% higher by 2031, depending on the rate of deployment.”

The bank had a price target of 875p, while Peel Hunt recently cut to 785p from 810p in the wake of February’s annual results. These showed 5% growth in earnings and dividend per share.

Segro said it generated £91 million of new headline rent during 2024, the third best year on record and including a 43% uplift from UK rent reviews and renewals.

Peel Hunt believes that Segro’s land bank is a key feature of the equity story, with the potential to capture £422 million of new rent on current and future schemes, and a further £100 million potentially accruing from optioned land.

It said: “While the delivery of this pipeline requires significant capex (£5 billion on our estimates), it could also deliver material growth in both earnings and net assets – albeit over an extended period of time.”