Why I’d Buy Segro plc, Hold HSBC Holdings plc & Sell Rare Earth Minerals Plc

You’d do well to consider HSBC (LSE: HSBA) and Segro (LSE: SGRO) for your portfolio, but I’d be cautious with Rare Earth Minerals (LSE: REM). Here’s why

Today In The News

HSBC announced today that it was exploring various strategic options for its operations in Brazil, including a potential sale, although no decision has been taken so far. This news reinforces the investment case, in my view.

Elsewhere, Segro said it would spend about €40m to take control of Italy’s Vailog, a real estate development company, striking a bolt-on deal that is not a big event per se, but signals a commitment to grow the business while exploiting favourable conditions for buyers in the sector. 

Finally, REM issued an update on its SLPDR (Sonora Lithium Project Drilling Results), which was essentially a non-event, in my view. 

Segro: It’s Risky, But Is It Worth It? 

Segro is not such an obvious pick for retail investors, but it’s one name that could reward you awesomely, particularly if improving UK rental conditions and low vacancy rates will help it grow revenue at a faster face, while generating more cash flow in order to cover for capital investment and hefty dividends, which are mostly financed by debt at present.

Its stock is up 11% year to date, and has recorded a +41% performance over the last two years. A real estate investment trust, with £2bn of net debt as at 31 March (this figure includes its share of debt in joint ventures and was unchanged from 31 December 2014), Segro is a high-risk investment that doesn’t look overpriced based on trading multiples, although its balance sheet is clearly stretched. 

Its stock currently trades at 422p, or 7 % below its 52-week high of 454p, which it recorded on 8 May.

HSBC Has Options 

HSBC has options when it comes to strengthening its balance sheet, and disposals are one of them. This is a good thing, even though its core capital metrics appear to be safe. If the bank manages to sell its assets in Brazil at a premium valuation — and there’s reason to believe it could do that — its own equity valuation would certainly benefit, I’d argue.  

In recent weeks investors seem to have preferred Lloyds (+12.9% since 30 April) and Barclays (+9.2% since 7 May), but a 4.6% drop since the end of April render its stock even more attractive. 

HSBC is considering options for its headquarters; frankly, I think I’ll be very difficult for the bank to move away from the UK. The shares currently trade at 620p. Based on their fair value, upside could be in the region of 10% to 15% to the end of the year, in my view. 

Not Much In Rare Earth Minerals’ Latest Update

It takes a huge leap of faith to snap up REM right now. 

As I argued in early April, REM is a highly speculative bet that will need more solid updates than the one it released today to boost its own equity valuation. The stock is down 3% today and 14% in the last 8 weeks of trading — more downside is apparent. 

A lithium-focused exploration company with a market cap of £70m, REM will continue to burn cash for some time, given that it doesn’t generate any revenue, and may need additional equity injections from shareholder to keep going. The longer it takes for REM to announce any meaningful development, the more expensive will it become to finance its development plans, which may eventually open the door to a change of ownership or new partnerships.