Big Yellow – ‘Hold’ Was the Right Short-Term Play (OTCMKTS:BYLOF)

Dear readers/users,

In my last article on Big Yellow (OTCPK:BYLOF), I switched from “Hold” to “Buy” and while we’ve seen a bit of volatility with two ups and downs since late May, about 2 months at this point, so far I have I was correct in my assessment of the company’s valuation. Big Yellow seems to have peaked a bit in the short term. I have looked at companies in the sector and have holdings in Public Storage (PSA) and the National Depository (NES), as well as this one. I like the self-storage sector for its long-term potential, stability and what the specific companies within it offer. These are usually some of the best managed REITs and/or real estate businesses.

But valuation remains key – and while the company here has had positive returns of around 1.5% over 2 months, this it’s underperforming the overall S&P500, and it’s also only due to a dividend payout. Without dividends, we are talking about slightly negative returns. You can find the latest article here. I am one of the few investors covering this company here on Seeking Alpha.

I’ve covered the company for most of 2024, and I think the long-term performance and appeal here is assured – as far as my position goes. There are better European REITs available for your consideration right now – take a look at some of the French ones I cover if you’re looking for value.

Let’s look at Big Yellow and see what we have in 2H and the rest of 2024.

I want to reiterate at this point that the UK investment market became a bigger player for me in 2024. I went from a 0.7% portfolio share in this market to almost 4% of my total. The companies I’ve invested in are utilities, but also REITs like this, telecommunications, consumer defensive, and the like. The market, in some ways, is ripe for investment, and I think that while the company may not necessarily be the best play here, there are plenty of reasons to keep an eye on it.

Big Yellow’s Advantage and Advantage.

Self-storage is an attractive segment, especially if we talk about urban areas – where the “big yellow” has its most assets. With over 25 years under its belt, this company is by no means ‘new’ at what it does and compares favorably internationally even with PSA when looking at coverage for their specific nation.

The same logic applies to PSA and Big Yellow here. These companies work in relatively underpenetrated markets and we want businesses that focus on urban areas. This company, like PSA, has good customer satisfaction scores and works in concentrations that can be found in high population areas, which include the capital of England and a densely populated southeast.

As of 2H24, the company operates over 100 stores on the platform. In addition to these stores, the company is also a landowner with the ownership of 10 development sites, reaching a total leasable area of ​​6.4 million sq m, including armadillo- and another million added in sq m if the company’s developments on its sites are completed. Over 90% of the company’s assets are held either in freehold/long lease.

Big Yellow is by far the most recognized self-storage brand across England and the UK. Over 90% of the company’s customer inquiries are now from online, meaning there is great brand recognition and awareness. This makes complete sense when you consider that the company’s stores are on major roads and close to major traffic and urban centers, and the company’s centers are far from “subtle”, confirming the namesake. Take a look here.

And some of them are even more “blatant” than that. Looking at recent trends for the company’s operations, we see significant growth in total store EBITDA of 7% over 2023A, as well as continued growth in profit and cash flow. Revenues increased by 6%. The company’s store count is, as of 2024, up to 109 out of 108. The only downside is that the company’s occupancy rate is below 80% – although like-for-like it remains at nearly 81%. The company also managed a 5% rent increase, which is good (but led to a 2% drop in occupancy, no doubt partly due to pricing).

It’s also worth remembering that this take-up reflects a small dilution in store count and lettable area, rather than generally unfavorable trends for the company and lower customer demand. Margin grew nearly 1% and the company continues to pay an attractive dividend.

CapEx is spent on solar retrofit, with 47% renewable capacity. 68 out of 108 stores now have solar power, and the capacity is up to 6.6 mW.

The company also had a dilutive cap raise, 6.3% of issued share capital to finance the build, bringing £107m to the table, and M&A in 2024 included freehold properties in Leicester and Leamington. This brings the company’s development pipeline to 12 locations, 11 of which are in or near London. London is generally something you want to focus on here given the population density.

The monthly activity KPIs also reflect a recovery in the company’s operations towards the end of the period, with an increasing number of moves at the end of the fiscal period.

We won’t get any new data until the end of November this year – meaning this article will be the last update until then, unless something significant changes in the interim. The only thing that would change this is if the company’s valuation dropped significantly. This is now a self-storage REIT, yielding less than 3.5% for its native ticker BYG. It trades at a relatively significant premium to AFFO and has moved in tandem with the rest of the self-storage industry that I follow, including PSA and NSA, two of my top picks here.

BYG/BYLOF is a great buy at a cheaper price. I expect new capacity, 3-5% rent growth and operational efficiencies to drive returns of over 6-7% per year in AFFO improvements. But now it’s all I expect. And given the company’s lack of an IG credit rating, given the low yield, and given the premiumization that we have here, despite a slight underperformance of the stock, I think we lack the clarity to invest more here, with unless the company would go higher.

Let’s look at the valuation and what you could get if you were to invest here.

Big Yellow – Plenty to like, if it would drop to 18-19x P/AFFO

So, as you can tell, the issue here remains valuation. At £12.92 on the native share, implying a yield of around 3.5%, the company is significantly overvalued. Forget for a moment that the 10-year average is 17.5x, or the 5-year average is just 19.5x, the company is now trading at 21.35x P/AFFO, which is on par with or even above industry leaders with IG rating here. And that’s not something I can easily or lightly accept when it comes to this company.

This has nothing to do with BYG’s quality. The company is a great deal – less than 15% long-term debt/cap also makes IG a bit excessive if you want to look at it that way.

But the truth is, historically, the company did not it has maintained this kind of rating level for a long time. If you look back, every time the company went over 20 times, we went down – sometimes really hard. During COVID-19, it traded below 14x P/AFFO for quite some time and even now, it is trending around 16-20x P/AFFO on average.

The accuracy of the company’s forecasts is a point in its favor. The company always hits targets, even exceeding targets by more than 10%, 33.3% of the time (Source: FAST Graphs Paywalled Link), which is pretty impressive.

The 20-year average forecast gives us an upside of about 8.4% pa, including dividends, at a P/AFFO of 20x. That’s not enough to interest me, and it shouldn’t be for you. A total RoR of 23% for 3 years is just not attractive when you see what else you can invest in.

Average PTs for the company range from a low of around £11.5 and a high of £15/share. Only 3 out of 15 analysts are currently at a “BUY” on this company – and from that perspective, the company is a pretty unattractive prospect. For me to want to invest here I refer you to my previous PT which is still my current PT and is £11/share for native.

For the BYLOF ADR, which is a 1:1 SHARE ADR, we make it a USD PT of $14.5/share, which means the ADR is equally valued here. In my last article, I switched to “Hold”. In this article, I don’t see a good reason to deviate from this, and because of that, I say you should consider waiting here until the company becomes more attractive.

Because if history is any guide, that should happen sometime in the next few years.

thesis

• Big Yellow Group is the largest self-storage REIT in the UK and one that I consider still in the early stages of development. This company has what I consider a bright future and good prospects for further growth both inorganically and organically as its services expand to other cities and geographies across the UK.
• I also want to highlight the company’s fundamentals, which are actually very solid. The company may not have an official credit rating, but it still provides security to a degree that I consider good enough to invest. It is diversified enough that the company is not likely to see a sharp drop from any market, except maybe London, which I think is unlikely.
• However, as of the latest update, the company is growing too much based on my stock price target – and I’m not changing my stock price target here.
• I still consider Big Yellow Group a ‘HOLD’ with a PT of £11/share and a target P/FFO of no more than 18-20x P/FFO and becoming less interesting as it rises above 20x. This is updated for August 2024.

Remember, I mean:

1. Buying undervalued companies – even if that undervaluation is slight, and not dizzyingly massive – at a discount, allowing them to normalize over time and collecting capital gains and dividends in the meantime.

2. If the company goes well beyond normalization and into overvaluation, I take profits and rotate my position into other undervalued stocks, repeating #1.

3. If the company does not become overvalued, but is at a fair value or falls back to undervalued, I buy more as time permits.

4. Reinvest dividend income, job savings, or other cash inflows as specified in #1.

Here are my criteria and how the company meets them (in italics).

• This company is generally qualitative.
• This company is fundamentally safe/conservative and well managed.
• This company pays a well covered dividend.
• This company is currently cheap.
• This company has realistic upside based on earnings growth or multiple expansion/reversion.

Because of this, the company does not meet my valuation criteria and now represents a “HOLD” here.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.