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Big Yellow – can it generate enough cash to be assigned higher value?

Published: 21:10 10 Sep 2009 AEST

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Last week there was another company that had posted an increase in revenue in 2009. And although the increase was very modest, such achievements these days command curiosity. The company was a Surrey-based self storage specialist – Big Yellow PLC (BYG). The London-listed, £481m-Cap provides self-storage facilities to domestic and business customers around the country, with particular emphasis on London (69% of stores are within the M25).  

The 273 employees of the company labour on 54 sites renting out storage rooms ranging in size from 10 to 500 sq ft (92% of these are freehold). Big Yellow has another sixteen stores in its pipeline. A typical store would be around 60,000 sq ft, with average room rented being 60 sq ft bringing in some £27 per sq ft per year. To complement the storage revenue the company offers packing materials as well as insurance to its customers (around £8m in revenue in 2009).

Another source of revenue for the company is in the form of management fees for the running of ten free hold Armadillo storage facilities in the North for HSBC Investments (five year management contract).

In the financial year 2009, somewhat unsurprisingly, Big Yellow saw its occupancy rates fall to 55% (from 62% in 2008), mainly caused by new store openings. Undeterred, the company continues investing heavily into its Internet marketing programme (main marketing channel, with an annual budget of around £1.6m). Big Yellow has been found to be the most innovative UK self-storage company, with the best quality service and the strongest brand in the self storage market (YouGov PLC survey in 2008).

The company’s capital base is made up of £330.5m worth of debt (almost in its entirety long term, £17m available of un-drawn) and £502.3m of equity. Debt to Equity Ratio is thus 65.8%. Considering that the company’s cost of debt is 5.9% and its beta is 1.33, the cost of capital equals 8.3%. 

The annual revenue to 31st March 2009 has come in at £58.5m (£56.9m in previous year), an increase of 3%. Considering that 54% of storage room rentals are linked to the housing market the growth in revenue is very commendable. The gross margin declined by some 60 basis points in 2009 (compared to 2008), but control of administrative expenses was solid at 9.8% of revenue in 2009 (11.8% in 2008). Operating profit before movements in property assets has thus come in at £30.9m (£29.3m in 2008), an uplift of 5.5%. The adjusted EPS before non-recurring items ended up at 11.89 pence to 31st March 2009 (11.72 pence a share in 2008).

Further down on the income statement losses on revaluation of investment properties, negative movement on derivatives (interest rate swap contracts, non-speculative), as well as a higher finance charge have all caused a net loss for the year of £72.6m.

Total Assets stood at £859.5m at 31st March 2009 (£914.8m in previous reporting period). The reduction is mainly attributable to a drop in value of assets held for re-sale, as well as the impairment and reclassification of development property. The company held £3.2m of cash and equivalents as at 31st March 2009.

Total Liabilities have expanded slightly, from £333m in 2008 to £357.1m at 31st March 2009. The reasons are higher level of debt, as well as derivatives liabilities. Liquidity deteriorated from Current Ratio of 0.96 at 31st March 2008 to 0.58 at 31st March 2009.

The cash flow from operating activities was negative £4.9m at 31st March 2009 (positive £2.4m in previous reporting period). The capital expenditure for the year amounted to £35.8m. Cash flow from financing activities added £21m of cash, mainly through a new HSH debt facility.

The dividend has been put on hold in 2009 (9.5 pence a share in 2008) due to the need to retain cash for build out of existing store pipeline without further indebtedness.  

Do I consider the current share quote of £3.90 to be an accurate reflection of the company’s worth? For the time being it would appear so; the reason –heavy CapEx over the last five years rendered free cash flow to equity negative. The company will need to demonstrate it can generate cash before being assigned higher value.

Weaker points to consider include: a) relative dependence of business on housing market, b) new stores take a fairly long time to get to full occupancy (4 yrs to get to occupancy of 85%), c) the business demonstrates a seasonality pattern, d) the company takes planning risk by purchasing properties on “planning conditional basis”, e) domestic market is relatively small in size (although relatively weak penetration compared to USA or Australia).

Stronger points to consider include: a) solid brand, b) company is on Sunday Times list of “100 best companies to work for”, c) been able to increase rents by 4.5% per annum over last several years, d) 86% of revenue tax-exempt (REIT status), e) good pipeline of new stores, d) £25m of surplus land looking to sell over the next 18months, e) promising partnership with Promerica for the development of new centres in the Midlands, the North and Scotland, f) current share price trades at discount to Net Asset Value (NAV = £4.57).

Success factors going forward would be securing first class locations, successful and speedy planning and competitive financing.

The main competitor is Safe Store PLC.



Next interim announcement is due 18th November.

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