The UK's economy is about 4 per cent smaller than it was at its 2008 peak, but Big Yellow's underlying pre-tax profit has risen 58 per cent over that time. This can be explained largely by industry and geography: it lets storage units in big purpose-built sheds to consumers and businesses - a young sector now gaining traction - and it operates mainly in London, which is growing at the expense of other regions. With neither trend showing any sign of changing, it seems safe to assume Big Yellow will continue to grow faster than the wider economy.
- Strong operational performance
- Growing niche market
- Rising dividends
- Shares trade below net assets
- VAT hit after the Budget
- Uncertain property valuations
- Rising cost of debt
The company's operational performance this year has demonstrated its potential. Even as the UK slipped back into recession, Big Yellow increased both occupancy and storage rates. Rents increased 1.9 per cent over the quarter to the end of June, while like-for-like occupancy rose from 63.5 per cent to 67 per cent.
Finding very visible sites - such as on the A4 in Chiswick, where it opened its newest store in April - and plastering them with its big yellow branding, may be one reason for the company's success. Another is its investment in online marketing - more than four-fifths of its customers come from the website. Marketing is all-important because self-storage is under-used in the UK, relative to Australia and the US, even though Britons live in smaller homes. There's only about half a square foot of self-storage space for every UK citizen, compared with 1.1 square foot in Australia and 7.4 square feet in the US.
BIG YELLOW (BYG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 295p | MARKET VALUE: | £384.1m | |
| TOUCH: | 294.5-295p | 12-MONTH HIGH: | 328p | LOW: 218p |
| DIVIDEND YIELD: | 3.7% | PE RATIO: | 15 | |
| NET ASSET VALUE: | 380p | NET DEBT: | 55% | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 58.5 | -71.5 | -62.9 | nil |
| 2010 | 58.0 | 10.2 | 8.10 | 4.00 |
| 2011 | 61.9 | 6.90 | 5.30 | 9.00 |
| 2012 | 65.7 | -35.6 | -27.7 | 10.0 |
| 2013* | 68.5 | 25.3 | 19.5 | 11.0 |
| % change | +4 | - | - | +10 |
*Espirito Santo estimates (earnings figures adjusted - not comparable to prior years) Normal market size:2,000 Matched bargain trading Beta:0.94 | ||||
Growth potential usually comes at a price on the stock market. But Big Yellow's shares are hardly expensive. True, they trade on about 15 times expected earnings for the current year, which is above average. But those earnings are backed by a property portfolio worth 380p a share, net of debt - 29 per cent more than the share price. In the crudest terms, that means the company could be broken up and generate a 29 per cent profit - perhaps the most basic indicator of value investors know.
This is a simplistic metric in Big Yellow's case because the value of its estate is more theoretical than that of other property companies - the UK self-storage sector is too immature to have a liquid market of prime properties that surveyors can use as evidence for valuations. But it does suggest the company's shares are undervalued in the long term.
There are two wrinkles in the growth outlook, though. First, it has to refinance a £225m debt package this year in the toughest financing environment in living memory. Having obtained a 15-year, £100m loan from Aviva at a fixed rate of 4.9 per cent in April, the company shouldn't struggle to find a lender. But its cost of debt - currently very low at 3.7 per cent - will probably rise, eroding profits.
This prospect has prompted a change of strategy. The company already has planning permission to build self-storage warehouses on three sites. But chief executive James Gibson announced with May's annual results that he was putting the store expansion programme on hold after the Chiswick site opened. He wants to use the spare cash flow - after paying decent and rising dividends - to reduce net debt to £245m-£260m by 2014-15 (from £283m at present), thereby containing debt costs at about a quarter of pre-interest cash flows, even as the interest rate rises. Meanwhile, the company will try to grow by filling up its existing stores, rather than building new ones on the pre-recession trajectory.
The second issue is that customers will probably start having to pay VAT. Self-storage is currently exempt from sales tax, just as commercial property rents are. But chancellor George Osborne announced he was changing the rule in this year's Budget, subject to a consultation process now under way.
It won't affect Big Yellow's business customers, who occupy 35 per cent of store space, as they can reclaim VAT. Moreover, Big Yellow will be able to reclaim about £18m of tax paid on capital expenditure if the measure is introduced, which will help offset any negative impact on its profits. But the extra 20 per cent on the cost of providing self-storage services will still squeeze margins and boost prices, dampening demand from customers.
