Big Yellow has space to keep growing

Big Yellow Group (BYG) posted a mixed bag of results for the six months to 30 September. The elephant in the storage room is the £47.7mn it lost on the revaluation of its properties. That figure, when contrasted with the £205mn it gained on property revaluation over the same period last year, explains the storage operator’s 97 per cent plunge in pre-tax profit. Big Yellow also posted a slight uptick in net debt. Not enough that it should make shareholders panic, but any increase in leverage at a time when interest rates are rising is worth taking note of.

Yet, beneath this bad news, the underlying business case for Big Yellow is sound. Gross profit, the company’s revenue minus its cost of sales, has increased by 16 per cent. The occupancy figures are also looking OK, depending on which way you want to look at them. Like-for-like occupancy has increased from 86 per cent as at 1 April 2022 to 88 per cent as at 30 September, but it is down 2.2 percentage points from this time last year.

With a recession coming, you might expect that occupancy figure to fall further. After all, for most property businesses, a recession means a fall in take-up rates as company failures mean less businesses are willing to agree leases.

Yet, Big Yellow company is not so much a property company as it is a storage company that benefits from the tax break that comes from technically being a real estate investment trust (Reit). It does not rent offices, warehouses, shops to businesses or homes to people in the way other Reits do. Rather, it provides storage space as a service – something which people require even more during disruptive periods of their lives such as recessions.

This is part of the reason why the company did so well in 2020. A wider reckoning around where people wanted to live and why (caused by Covid-19) also helped demand for storage space but, generally speaking, disruption is the grist to Big Yellow’s mill. And more disruption is coming.

When we gave BYG a Sell rating this time last year, the company made a bearish prediction about the return to a “more normalised trading environment”. In other words, back then, a post-Covid economic recovery looked like it was on the way. In good news for the group - and bad news for everyone else - that has not happened. Analysts are forecasting growth in earnings and revenue in the years to come, and we agree. Even given the narrow discount to net assets, we still think it warrants a buy call due to prospective disruption in the economy. Buy.

Last IC view: Buy, 1,288p, 24 May 2022