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This stock’s 40pc slump presents a chance to bet on e-commerce

amazon warehouse operator
amazon warehouse operator

Buying opportunities frequently come disguised as risks, threats and challenges. Indeed, no stock price ever trades on a deeply discounted valuation without the presence of at least a degree of uncertainty regarding its prospects.

Investors who are able to look beyond short-term problems that are extremely unlikely to prove fatal can purchase high-quality stocks at exceptionally favourable prices.

Since the British economy currently faces a tough near-term outlook, there are countless buying opportunities on offer for long-term investors.

For example, shares in real estate investment trust (REIT) Segro have slumped by 40pc in little over a year.


The owner, manager and developer of warehouses in Britain and Europe was initially negatively affected by a profit warning from Amazon.

The world’s largest online retailer struck a cautious tone regarding the growth prospects for e-commerce. Indeed, the proportion of British retail sales conducted online has fallen from 38pc at its peak in January 2021 to 26pc in March this year.

Since Amazon is Segro’s largest customer, accounting for 7pc of its total rent roll, as well as a bellwether for the wider e-commerce industry on which the warehouse owner is heavily reliant, investor sentiment towards the REIT declined.

In addition, a difficult period for the retail sector, and the broader economy, in an era of rampant inflation, weak consumer confidence and rapidly rising interest rates has contributed to a disappointing share price performance over the past year.

Still, Segro’s shares are priced significantly higher than when this column first advised readers to buy them in July 2017.

They have risen by 66pc versus a rather paltry gain of 5pc for the FTSE 100. Further capital gains, and stock market outperformance, are ahead for several reasons in our view.

The company’s shares now trade on a price-to-book ratio of just 0.8 after their fall. This suggests they offer a wide margin of safety that provides scope for capital growth.

Certainly, there is potential for the company’s net asset value (NAV) to decline following its 15pc dip in the most recent financial year.

However, the prospects for the economy, and e-commerce sector, are likely to improve and result in growing demand for its warehouses.

Consumer confidence has already risen to its highest level since February last year. With inflation forecast to fall rapidly this year, and the economy’s growth rate expected to improve, the cost of living crisis is set to ease.

Although e-commerce sales as a proportion of total retail sales have declined since pandemic-induced lockdown measures abated, the long-term shift towards online sales is unlikely to end.

Several major retail areas, such as groceries, remain digitally under penetrated.

Therefore, the Covid-related surge and subsequent drop-off in online sales may prove to be a one-off event that does not impact the long-standing trend that saw digital sales as a percentage of total retail sales treble in the 10 years to 2020.

While demand for warehouses is likely to rise, their supply remains severely constrained.

A lack of suitable locations in urban settings, and intense competition for land from residential development, mean that Segro’s occupancy rate is likely to remain high.

It stood at 96pc according to its latest trading update, while the company’s uplift on rent reviews and renewals was 14pc during the first quarter of the year.

With a pipeline of new projects amounting to roughly 13pc of its annual revenue either under construction or due to commence shortly, the company has attractive growth potential.

Its loan-to-value (LTV) ratio of 33pc, an average cost of debt of 2.7pc, and 92pc of its borrowings having either fixed or capped interest rates shows that it is in a strong financial position to deliver a share price recovery.

Clearly, its valuation may continue to be depressed while investor sentiment towards UK stocks remains weak.

But the company’s fundamentals are sound and the industry in which it operates has significant growth potential as an economic recovery takes hold, consumer confidence improves and spending increasingly shifts to online channels.

As is often the case, Segro’s share price decline over the past year may be viewed by some investors as a cause for concern.

But, in Questor’s opinion, it represents a worthwhile buying opportunity for long-term investors.

Questor says: buy

Ticker: SGRO

Share price at close: 806.6p

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