Big Yellow's big premium

You need to head back to 2013 for the last time Big Yellow Group (BYG) shares traded at a discount to book value forecasts. But, in recent months, the self-storage giant’s market price has started to fundamentally test that traditional valuation measure for property companies.

According to FactSet, the shares now trade at an 88 per cent premium to forecast book value for March 2022, and 79 per cent above 2023 consensus. Granted, there is something of a gulf between the IFRS and EPRA measures of Big Yellow’s net assets, but even on the latter test the shares are 50 per cent ahead of the 2024 analyst estimate.

On balance, investors should probably view Big Yellow as a services company, even though it retains the tax benefits of the Reit structure. But half-year results, against some (relatively) flattering comparatives, show why shareholders have been prepared to pay up for a company that offers what feels like a commoditised, low-tech product: empty space.

Though the group-wide maximum lettable area crept up by just 2.7 per cent to 6.06 million square feet (sq ft), closing occupancy climbed across the legacy and Armadillo-branded store portfolio. This, combined with a spike in closing net rent per sq ft, meant like-for-like store revenue jumped 15 per cent and overall store revenue leapt a quarter.

Though this helped push earnings ahead of consensus expectations, comments from executive chairman Nicholas Vetch suggest a plateau is coming, as “historically high levels of occupancy” make way for “a more normalised trading environment”. Despite capital growth options in the development portfolio, a record forward P/E multiple of 33 now looks too much. Take profits/sell.

Last IC View: Hold, 1,155p, 17 Nov 2020