Investors’ Chronicle: Big Yellow, Victorian Plumbing, Severn Trent
BUY: Big Yellow (BYG)
The self-storage landlord and operator has posted another strong set of results, but its value has not been recognised by the market, writes Mitchell Labiak.
It is a sign of the strength of Big Yellow’s margins that, despite taking a £29.9mn valuation hit, the self-storage landlord and operator was still able to post £75.3mn in pre-tax profit from £189mn in revenue in its results for the year to March 31.
Other real estate investment trusts (Reits) have not been so lucky. The “mini” Budget-driven interest rate spike reduced buyers’ budgets overnight and led to a bruising revaluation for Reits across the board. Most have posted pre-tax losses in the months since, but not Big Yellow.
The pre-tax figure is still heavily down on last year due to the revaluation, but the prospect of future earnings looks good. Operating profit before value changes was up 12.6 per cent due to a 9 per cent bump in net rent per square foot. In other words, even as Big Yellow expands its portfolio, it is still seeing an increase in demand for its services which it can use to drive up rents.
Meanwhile, the increased efficiency from having a larger portfolio means it has been able to steadily increase its operating margin from an already high 60.3 per cent in full-year 2021 to 63.6 per cent in this year’s results. Such high margins will hit a ceiling eventually but, for now, shareholders are benefiting from the good times with dividends increasing by a further 8 per cent.
Such performance from Big Yellow is not new, but in the past shareholders typically had to pay a large premium to net asset value (NAV) for this stock. Right now, however, the wider misfortunes of the property sector mean that investors can buy into Big Yellow at a marginal discount to NAV. For that reason and several others, we reiterate our call.
HOLD: Victorian Plumbing (VIC)
The bathroom products retailer is growing. But not fast enough to justify its price just yet, writes Mitchell Labiak.
Victorian Plumbing more than doubled its pre-tax profits for the six months to March 31. This sounds impressive, but there is a caveat. The increase of £2.9mn is not insignificant, but it needs to be seen in context, specifically with reference to the anaemic pre-tax margin of 3.81 per cent.
To a certain extent, the bathroom product retailer’s tight margins are to be expected. The company only listed in 2021 and so it is in growth mode, which means costs are going up. As it scales up, investors would expect that margin to increase. So far, however, the opposite has happened. Its pre-tax margin has shrunk from 11.4 per cent in its results for full-year 2020 to 4.38 per cent in last year’s preliminary figures. Its most recent results continue the trend.
The company pins some of this on inflation. It said staffing costs were up 18 per cent which it said was “slightly higher than anticipated owing to continuing inflationary pressures, and our commitment to attracting and retaining talent”. Meanwhile, it says that its 61 per cent increase in property costs was from “increasing its warehouse capacity on a more expensive short-term basis to support the growth of the business”.
To its credit, the company remains in a net cash position and has no bank borrowings whatsoever which is a big plus in an era of relatively high-interest rates. Still, at a price of 20 times earnings, the pace of growth for this company and its decreasing margin do not yet warrant a rating upgrade. We stick with our neutral position.
HOLD: Severn Trent (SVT)
An inflation-linked dividend is the water company’s most appealing feature as it battles negative headlines, writes Julian Hofmann.
Severn Trent, along with the rest of the privatised utilities, has long been cast in the role of “vital, but unloved” both for investors who look to the company for its gold-plated, inflation-linked dividends, and campaigners, consumers and politicians who regularly line up to give the water utility companies a good kicking.
Much of the past two years has seen the industry headlines dominated by the dumping of raw sewage — a topic that Severn Trent did well to mention only three times in its whole statement. Still, a private member’s bill currently winding its way through parliament that would impose mandatory targets for sewage dumping suggests a darkening of the political mood. To be fair to Severn Trent, the company does not appear to be the worst offender when it comes to unwanted effusions, but the situation underlines how another round of major capital investment by the water industry looks certain.
This had already crept up, with cash capex in these results nearly £100mn higher at £687mn, which was still below the company’s operational cash flow of £713mn. This was also reflected in reduced Ebit cover (earnings before interest and tax) of 1.4 times the company’s interest charge on its debt, a 0.5 percentage point fall. Meanwhile, operating profits at Severn’s core water business were lower at £468mn, offset by a strong performance at business services, where profits were more than 30 per cent higher at £49.2mn.
Overall, you can’t argue with the dividend, but on a price/earnings ratio of 32 times consensus forecasts for next year, the business looks fully valued by inflation chasers bidding up the shares.