Investment Column: Segro set to soar after canny purchase

Dunelm; Connaught
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The Independent Online

Our view: buy

Share price: 314.7p (-4.2p)

Icelandic volcanic ash clouds aside, all the indicators point to growth in air travel. That makes yesterday's move by Segro, Europe's largest listed landlord, which announced the purchase of a 50 per cent stake in Airport Property Partnership, a wily one. The group has paid £111.3m for 17 warehouses and offices. APP's properties are largely concentrated around Heathrow Airport and tenants include FedEx, and Deutsche Post's logistics unit, DHL.

Time, of course, will tell if this particular deal turns out to be a good one, but it is indicative of growing confidence in the property sector. Segro said yesterday that it is seeing improvements in the UK, while its operations in Europe have stabilised.

The other good news is that the group's vacancy rate, a key measurement in the property industry, had dipped to 14.6 per cent at the end of March, against 14.8 per cent in December. Ian Coull, Segro's chief executive, said: "We're certainly not forecasting that this is the start of a full-blown recovery but the first quarter of this year has given us a fair degree of encouragement."

In our view, the property market is past the worst, although that is not necessarily reflected in Segro's share price, which contrary to market trends, has dropped by more than 15 per cent in the last six months after a period of strong growth. Even yesterday's news did little to excite investors.

We are buyers, however. Segro offers decent value, trading at 0.84 times net asset value per share, and offering a yield of 4.4 per cent, which should compensate for the rather inert share price. We are also attracted to what the group can squeeze out of the portfolio it acquired when it bought Brixton Estates last year. Buy.


Our view: Hold

Share price: 397.2p (+34.9p)

Until it floated in October 2006 at 170p, Dunelm was one of the sector's best-kept secrets. But the out-of-town homewares retailer's continued strong performance and expansion programme has certainly got it noticed since then.

Yesterday, the 102-store chain again delivered the goods by posting a 10 per cent increase in like-for-like sales on stores open more than one year for the 42 weeks to 24 April. While this powerful rate of growth has slowed to a more modest 3 per cent over the nine weeks to last Saturday, Dunelm said that its gross margin was up by 80 basis points over the period.

In a further tonic for investors, Will Adderley, Dunelm's chief executive, said he was "pleased" with the reaction from customers to the new and refitted stores. This matters because expansion is the name of the game for Dunelm over the coming years.

It believes the UK can take "at least" 150 to 200 Dunelm superstores, the bigger format that forms the overwhelming majority of the estate. Over the 42 weeks, the contribution from new space fuelled a 19.9 per cent jump in total sales to £405.7m. But Dunelm's shares have had a good run recently, despite profit-taking from investors yesterday, and trade on a multiple of 15.2 times 2011 forecast earnings. As a result of its premium to the rest of the sector, we don't think that Dunelm will set the sector alight in the short term (we bought at 235p). However, we remain long-term supporters. Hold for now, but buy on any weakness.


Our view: buy

Share price: 302p (+25p)

Holders of Connaught, which maintains social housing and helps workplaces comply with health and safety norms, must be exhausted. The shares, which were trading at around 370p in mid-January, slumped below 250p around the end of March before bouncing back in recent weeks. Last night's gains – it shot up by around 9 per cent after posting interim results – brought them back above 300p. The volatility was down to factors such as the departure of the chief executive, Mark Davies, at the end of January, bid rumours and, more recently, the uncertainty over a contract in Norwich (now resolved).

The question, then, is whether the recent recovery can be sustained. After all, such a run of strength prompts worries about another pullback. Happily, yesterday's results suggest otherwise. Management – executive chairman, Mark Tincknell, moved into the chief executive's suite in February – justifiably boasted of a good set of figures, with the order book offering reassurance in the form of healthy growth. Moreover, Connaught is trading on just 5.9 times enterprise value-to -forecast earnings for 2011. That's too cheap. Buy.