Investor Chronicle: Big Yellow, Victorian Plumbing, Severn Trent

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BUY: Big Yellow (BYG)

The self-storage owner and operator posted another solid run of results, but its value was not recognized by the market, writes Mitchell Labiak.

It is a sign of the strength of Big Yellows margins which, despite suffering a £29.9m valuation decline, the self-storage owner and operator was still able to post a £75.3m profit before tax from a £189m turnover pounds in its results for the year to 31 March.

Other real estate investment trusts (REITs) haven’t been so lucky. The budget-driven “mini” spike in interest rates squeezed buyers’ budgets overnight and led to a sharp revaluation of REITs across the board. Most posted pre-tax losses in subsequent months, but not Big Yellow.

The pre-tax figure is still sharply down on last year due to the revaluation, but future earnings prospects look good. Operating profit before value changes increased 12.6% due to a 9% increase in net rent per square foot. In other words, even as Big Yellow expands its portfolio, it’s still seeing increased demand for its services that it can use to raise rents.

Meanwhile, the increased efficiency from having a broader portfolio means it has been able to steadily grow its operating margin from an already strong 60.3% in full year 2021 to 63.6% in this year’s results. year. Such high margins will eventually hit a ceiling but, for now, shareholders are benefiting from the good times with dividends up a further 8%.

Such performance by 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 broader real estate woes mean investors can buy Big Yellow at a marginal discount to the NAV. For this reason and for many others, we reiterate our call.

HOLD: Victorian Plumbing (VIC)

The bathroom products retailer is on the rise. But not fast enough to justify its price yet, writes Mitchell Labiak.

Victorian Plumbing more than doubled its pre-tax profit for the six months to March 31. Sounds impressive, but there’s a caveat. The £2.9m increase is not insignificant, but needs to be seen in context, particularly with reference to the anemic pre-tax margin of 3.81%.

To some extent, the bathroom retailer’s tight margins are to be expected. The company is only listed in 2021 and therefore is in growth mode, which means costs are rising. As it increases, investors would expect that margin to increase. So far, however, the opposite has happened. Its pre-tax margin shrank from 11.4% in full-year 2020 results to 4.38% in last year’s preliminary data. His most recent achievements continue the trend.

The company attributes some of this to inflation. It said personnel costs were up 18%, which was “slightly higher than expected due to continued inflationary pressures and our commitment to attracting and retaining talent.” Meanwhile, it says its 61% increase in cost of ownership was due to “increasing warehouse capacity on a more expensive short-term basis to support business growth.”

To its credit, the company remains in a net cash position and doesn’t have any sorts of bank loans, which is a big plus in an era of relatively high interest rates. However, at 20 times earnings, this company’s pace of growth and declining margin still doesn’t warrant a rating upgrade. We maintain our neutral stance.

GRIP: Severn Trent (SVT)

An inflation-linked dividend is the water company’s most attractive feature as it battles negative headlines, writes Julian Hofmann.

Severn Trentalong with the rest of the privatized utilities, it has long been cast as a “vital, but unloved” role for both investors who approach the company for its gold-plated, inflation-linked dividends, and activists, consumers and politicians who regularly line up to give water companies a good kick.

Much of the last couple of years has seen industry stocks dominated by raw sewage dumping, a topic Severn Trent was right to mention just three times in his entire statement. However, a private member’s bill currently being advanced in parliament that would impose mandatory targets for wastewater discharge suggests a darkening of the political mood. To be fair to Severn Trent, the company doesn’t appear to be the worst when it comes to unwanted outflows, but the situation underscores that another round of major capital investment from the water industry looks certain.

This had already increased, with cash invested in these results nearly £100 million higher to £687 million, which was still below the company’s operating cash flow of £713 million. This was also reflected in the reduction in coverage of Ebit (earnings before interest and taxes) by 1.4 times the company’s interest burden on its debt, a decrease of 0.5 percentage points. Meanwhile, operating profits from Severn’s core water business were less than £468m, offset by a strong performance in business services, where profits were more than 30% higher at £49.2m.

Overall, you can’t argue with the dividend, but at a price/earnings ratio of 32 times the consensus forecast for next year, the company looks fully appreciated by inflation chasers bidding on the stock.