GXO
Price $63.97
52 week high-low $67.57 – $32.10
Net Yield 0.0%
Hist/Pros PER 38 /24
Equity Market Cap (M) $7,608
Industrials
Neil Shelton (Head of Investor Relations), Richard Cawston (President Europe)
GXO are in logistics. They make their money by being great at setting up and running automated warehousing for their clients, such as Nestlé.
The Nestlé warehouse that I saw receives incoming goods from Nestlé’s factories and then sends them out to customers’ shops and warehouses. The warehouse is a vast and mostly robotically operated “big box” close to Derby. Other clients like LVMH and Nike use GXO to fulfil individual online orders and deal with returns; and this accounts for 35% of their business.
Nestlé could try to manage their own warehouse and distribution but it makes sense to outsource the job to specialists (like GXO). GXO have hundreds of clients and can share their expertise and learning amongst all their clients.
GXO’s knowhow allows them to aspire to a 30% return on invested capital. They lease properties, but the cost tends to be passed through to the client. The company buy in robotics and automated warehousing systems made by companies like Swisslog but they do not own much of the IP or technology themselves.
GXO have strong revenue growth aspirations of 10% per annum out to 2027. They advised that tailwinds (factors that benefit a company’s growth) include the fact that many supply chains are still not outsourced, which means that their total addressable market should grow from $456 billion to $660 billion by 2027. They conclude that the outsourced segment of that market will grow from $146 billion to $231 billion and so aspire to take their revenue from $8 billion to $17 billion over the same timeframe. This should drive a Compound Annual Growth Rate (CAGR) of 17%. The risks are that knowhow is a weak defensive moat which could allow margins to be squeezed.
SEGRO
Price £7.37
52 week high-low £9.68 – £6.69
Net Yield 3.7%
Hist/Pros PER 9.68/6.69
Equity Market Cap (M) £8,997
Real Estate
Soumen Das (CFO), Claire Mogford (Head of IR)
SEGRO is a real estate investment trust (REIT) which specialises in urban and out of town warehousing. After a stellar two years in 2020 and 2021 following the pandemic-induced rush for warehouse space, property valuations were hit by rising interest rates. It was clear, then, that Das was pleased to report first half results that were relatively more sanguine. With interest rate rises having likely been baked into valuations, Das seemed more comfortable with where valuations sat. This was evidenced by a recent transaction where SEGRO was able to dispose of a portfolio of warehouses at a value above the December 2022 and June 2023 valuations. He expects future disposals will achieve at least current book values, giving him confidence that current values are broadly correct.
Aside from valuations, we also discussed the operational trends, which remain favourable even in light of the weaker macroeconomic environment. The period saw solid 5.1% growth in like-for-like rents and saw a 20% uplift on those leases coming up for review. Qualitative commentary from Das explained that the demand remains broad based, with the vast majority of tenants in good financial condition.
The big risk to the business remains the macroeconomic environment. If the most recent Consumer Price Index print transpires to be anomalous and core inflation reaccelerates, this would mean more interest rate hikes to come and more pain for SEGRO’s property valuations. This is out of SEGRO’s control though – and they seem focused on achieving good operational performance and improving the quality of their portfolio by using disposals of weaker assets to fund acquisitions and development.
Shaftesbury Capital
Price £1.18
52 week high-low £1.32 – £0.93
Net Yield 2.7%
Hist/Pros PER NA/NA
Equity Market Cap (M) £2,277
Real Estate
Ian Hawksworth (CEO), Situl Jobanputra (CFO), Chris Ward (COO)
Shaftesbury Capital was formed through a merger of two real estate investment trusts (REITs) at the beginning of 2023. Shaftesbury, a landlord which owned a £3.2bn portfolio in London’s West End – including Carnaby Street and China Town – combined with Capital & Counties (CapCo), also a West End landlord, which owned much of Covent Garden with a £1.8bn portfolio. The continued integration of the two businesses continues to be a key topic in meetings with management.
Five months on, the integration appears to be going according to plan. One of the key benefits of the merger was £12m annual cost synergies and management were happy to announce progress on these and even increased the figure to £13.5m.
Shaftesbury Capital is not immune to the headwinds of rising interest rates and since the merger was announced the combined value of the portfolio has fallen from £5bn to £4.9bn. Falling valuations are all but inevitable when the cost of borrowing increases, but Shaftesbury Capital’s relatively modest value decline can be attributed in part to the unique location of the land in its portfolio: as purse strings tighten it is surprising how resilient the West End continues to be. Sales at its underlying tenants are now 15% ahead of 2019 levels, driven by resilient domestic consumers and international customers. This helped the company increase its estimated rental values (a key input to valuations) enough to offset 10 basis points of yield expansion to leave the valuation unchanged since December. A key question for investors is whether this can continue. As interest rates continue to bite, we will be watching this closely.
CONSUMER STAPLESHaleon
Ocado Group
FINANCIALSLondon Stock Exchange Group
Aviva
Beazley
HEALTH CAREOxford Nanopore Technologies
Smith & Nephew
Dechra Pharmaceuticals
INDUSTRIALSGXO Logistics
Raytheon Corporation
BAE Systems
Spirax-Sarco Engineering
INFORMATION TECHNOLOGYHalma
MATERIALSCroda International
Hill & Smith
Rio Tinto
REAL ESTATELondon Metric Property
British Land Company
Shaftesbury Capital
Supermarket Income REIT
SEGRO
UTILITIESTelecom Plus
National Grid
Sir John Royden, Head of Research
Henry Birt, Assistant Research Analyst
