FTSE 250 self-storage services provider, Big Yellow Group (LSE: BYG) touched all-time-highs last week in a run-up to its results this week. The results did not disappoint either.
Big Yellow Group shows healthy growth
For the year ending March 31, the company reported a 4.6% revenue increase yesterday. Of this, store revenue, which accounts for much of the total, grew by a strong 5.7%. Notably, the segment’s final quarter was particularly strong, with a 9.7% revenue rise, possibly reflecting recovering economic conditions.
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Its pre-tax profits were up by 5.1% as well, and notably, going by its statutory numbers they were up by a whole 185% because of the rise in the value of investment properties.
Favourable structural changes
Big Yellow Group is among the beneficiaries from the long-term structural shift towards online sales. This is because online sales require logistical support, that includes warehousing, one of the services provided by the company. While it was always expected to happen, the trend accelerated last year because of the pandemic. It points to this and “the shortage of quality flexible mini-warehousing space” as demand drivers for the company.
Strong performance in the past year is also visible in other companies related to online sales, from online retailers to packaging companies and from warehousers to delivery providers. These include FTSE 100 companies like Ocado, Mondi and Just Eat Takeaway, all of which benefited from last year’s lockdowns.
With a structural shift in its favour, I think the company’s price-to-earnings (P/E) ratio is still competitive. If I consider the ratio based on statutory earnings, it is at a low 8.7 times, and for me that makes Big Yellow Group a screaming buy. Because statutory metrics standardise financial reporting across companies, I think it is important to consider this measure.
At this time, I also need to understand its P/E when the impact of property investment valuation gains mentioned earlier is removed from earnings. This is because, the valuation gains may be one-offs that do not reflect the earnings from operations. Based on this measure, the P/E is at a much higher 31.2 times.
But even going by this measure, it is not the priciest stock around. According to my calculations, there are at least 70 FTSE 250 stocks that have a higher P/E than Big Yellow Group. In other words, it is attractively priced, making it a clear buy for me.
The red flag
The only red flag I see is overestimation of the prospects for online sales. Companies like Ocado and Just Eat Takeaway expect sales growth to slow down this year as there is greater freedom of movement. If there is a higher than expected moderation in growth, it would reflect in their stock prices too. And the same is true for Big Yellow Group.
However, the move towards online will not stop. It will only slow down. So for a still moderately-priced stock, there is potential for further gains. It is a long-term buy for me.