Goldman cuts Segro to 'sell' on leverage concerns

Shares in Segro were hit on Wednesday after Goldman Sachs downgraded its rating on the UK real estate investment trust from 'neutral' to 'sell', citing "balance sheet constraints".

Segro has delivered average adjusted earnings-per-share growth of around 7% through its last net investment cycle between 2014 and 2022, but Goldman sees this as unsustainable going forward.

The bank said this growth will "slow meaningfully" in the near term as the company reduces investment activity to lower the net debt-to-EBITDA ratio to around 9x, down from a peak of 12.2x at the half-year stage in 2023. Rising finance costs will also hamper growth, it said.

For 2022 to 2025, Goldman expects compound annual growth of just 2.7% in adjusted EPS "due to a balance sheet that is now stretched on net debt-to-EBITDA metrics".

"With an implied yield of 5.2%, there are less levered, less-expensive growth stocks among a global peer set and Segro’s shares have outperformed our UK and European coverage c.7% year-to-date," Goldman said.

"On a lowered [return on capital employed] and slightly higher [weighted average cost of capital], we reduce our target price 13% to 580p, which implies 16% downside, and we therefore downgrade the shares from 'neutral' to 'sell'."

The stock was down 2.8% at 692.6p, with the stock flirting with its yearly low of 675p.