The FTSE 250 storage company Big Yellow Group (LSE: BYG) just dropped a decent set of financial results, so I decided to roll up the shutters and take a peak inside.
I’ve not yet been fortunate enough to own so much excess stuff that I need a storage unit. However, I do like storing my spare capital in secure stocks. As it turns out, safely wrapping up dusty antiques in big yellow container units is big business — but is it a profitable investment?
Let’s take a closer look
On Monday (18 November), Big Yellow released its interim results for the six months to 30 September. And yet despite what initially looked promising, the shares closed down 1.8%.
The big story here was pre-tax profit, which surged 22% to £145.8m from £119.6m last year. That’s a surprising increase considering revenue only grew a few percentage points and occupancy was down 1%.
So the profit clearly came on the back of property revaluations. That’s a good sign, showing an effective strategy by the company to meet challenging market conditions. It’s further evident in the 2% decline in adjusted pre-tax profit, which excludes valuation gains.
Of course, the biggest thing that typically sways investor opinion is dividends. This is where Big Yellow may have disappointed slightly. The interim dividend was kept flat at 22.6p per share, reflecting a possible lack of confidence in future growth.
With a 3.92% yield, it’s still above the FTSE 250 average of 3.5%. But does it offer any advantage over the multitude of other dividend stocks with a similar yield?
Long-term prospects
Growth-wise, the stock looks pretty decent. Inflation suppressed price growth in 2022 and 2023 but it grew 7.3% in the past year. And in the 10 years prior to Covid, it climbed 270% — an annualised growth of 15% a year. So there’s evidence that it’s a stable and profitable stock during favourable times.
Earnings are forecast to decline at a rate of 1.3% over the next three years, with revenue expected to grow 5.3% a year. The average 12-month forecast expects a 23% increase to £13.46 from today’s price of £10.94. That’s fairly promising.
Risks and competition
A key risk is if occupancy declines further. While it remains up 33% over the past five years, it dropped slightly last year and could fall further by the end of 2024. If a strain on profits leads to a dividend cut, the share price could take a hit.
A key competitor in the UK is Safestore, the country’s largest storage group by number of stores. Big Yellow has a slightly larger market-cap but otherwise they’re close rivals. Using a discounted cash flow model, I see that both are estimated to be trading around 30% below their fair value.
Both pay a similar dividend and have low price-to-earnings (P/E) ratios. They also have a net margin of around 120%, strong cash flows and sufficient interest coverage. However, Safestore holds almost twice the debt of Big Yellow. It’s a small advantage but one worth noting.
Overall, it appears to operating moderately well but still, I don’t see a hugely compelling reason to invest in the stock at this point. It’s worth me keeping an eye on though.
