Big Yellow Group (LSE:BYG) is the UK’s brand leader in self-storage, operating from a platform of 109 stores. In a world where space is at a premium, particularly in urban areas, the company’s business model seems well-positioned for growth. The shares in this real estate investment trust (REIT) have seen a solid run, up about 19% in a year. However, I think there are indications that Big Yellow might still be undervalued.
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Digging into the numbers
According to a discounted cash flow (DCF) calculation, the shares could be trading at around 23.2% below estimates of its fair value. Although there may be more potential in sectors such as technology, I value finding companies with relatively predictable revenues, and a steady path to further growth.
The company’s price-to-earnings (P/E) ratio stands at a reasonable 10.2 times, lower than many of its REIT peers, where the average is about 21.2 times. Looking ahead, annual revenues are forecast to grow by 5.34% for the next five years. While not explosive, it’s steady. Of course, no forecast is ever guaranteed. But for my investment style, a small, steady forecast is more comfortable than a highly speculative one, which may disappoint investors.
For income-focused investors, the company offers a dividend yield of 3.61%. With a payout ratio of 81%, the dividend appears to be pretty sustainable. The firm’s dividend track record backs this up, with small but steady increases in the amount paid out in dividends since 2015.
Potential risks
Of course, even in a fairly stable sector, no investment is without risk. Analysts forecast a slight decline in earnings, averaging 1.2% per year for the next three years. This could be slightly off-putting for would-be investors in the near term.
The company has also diluted shareholders in the past year. Although the number of shares outstanding only increased by 6.5%, it’s always something to keep an eye on. However, my primary concern is a lack of diversification in the business. With all revenues coming from the UK market, any downturn in the economy could be a real problem for the business.
Despite these potential risks, management’s strategy looks promising. The company has a pipeline of 13 new self-storage facilities over the coming years. This expansion could drive future revenue growth. Moreover, as urbanisation continues, the demand for self-storage solutions is likely to increase. The firm, with its strong brand and market position, seems well-placed to capitalise on this trend.
Foolish takeaway
So while it might not be the most glamorous stock on the market, the company has several attributes that I think make it a potential winner for value investors. Its potential undervaluation, combined with a solid dividend yield and steady growth prospects, tick a lot of my boxes.
In the end, sometimes the best investments are found not in flashy tech stocks or exciting start-ups, but in steady, reliable businesses consistently delivering value. Big Yellow, with its bright outlook in the self-storage sector, might just be one of those hidden gems in the FTSE 250. I’ll be buying at the next opportunity.
This post was originally published on Motley Fool
