UK Edition
Questor: put some Big Yellow shares into safe storage as Brexit turns us all into hoarders
Questor share tip: big firms are already stockpiling supplies and Britain’s army of entrepreneurs may follow suit
The political deadlock of recent weeks means a no-deal Brexit is increasingly likely on March 29 next year. And then what? Getting ready for an uncertain future is like stockpiling the fridge for Christmas. Shoppers inevitably buy too much, just in case long-lost relatives turn up on the doorstep. Where to put all those extra provisions is the question.
Companies owe it to their shareholders to be ready for all eventualities too. Even level-headed global players such as catering giant Compass are increasing inventories in case importing food from the Continent is disrupted in the spring. Manufacturers with international supply chains are also putting parts by so that production is not disrupted.
This Brexit bulge is one reason for the supply of warehouse space being at its lowest level in a decade. Another is the rise in ecommerce, which has relocated retailers’ stocks from the back room of the shop to giant stores that ring major cities.
What used to be called light industrial space is at a premium in London, having shrunk by 50pc in the past 25 years. This is why warehousing firm Segro, whose tenants on the edge of the capital include Amazon and John Lewis, briefly eclipsed retail and office-focused Landsec recently as the largest property company in the FTSE 100. Its shares are up by a fifth since we tipped them in July last year.
If 2019 is poised to be the year of the hoarder, there should be some read-across to the world of self storage. Big Yellow, the best-known name when it comes to finding somewhere to sling belongings that people can’t bear to throw out, posted strong half-year figures in November, with net rent per square foot up by 3.7pc to £26.97 and 84.9pc occupancy.
After raising £65m in a share placing the company is in the midst of a £100m investment programme to add 15pc to the size of its existing portfolio, which comprises 75 purpose-built storage centres, mainly in the South East of England.
The expansion isn’t surprising, given that analysts at Jefferies, the bank, have pointed out that earnings growth is slowing and increasingly reliant on new developments. Big Yellow is having to work harder to win planning permission.
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In order to double the size of its facility in Battersea, south London, it agreed to build 168 homes on the site, 35pc of them “affordable”, plus studios and offices for the community.
The company boasts of delivering total shareholder returns with dividends reinvested of 15pc per annum since flotation in 2000. Co-founders Nicholas Vetch and James Gibson, a chartered surveyor and a chartered accountant, remain at the helm. Vetch’s shareholding is worth just shy of £80m.
From being one of the more exotic branches of the property sector, self storage has gone mainstream. Big Yellow’s cause has been helped by the flotation in October of Shurgard on Euronext in Brussels. The larger European rival priced its shares at the bottom of the range but they have risen in the weeks since.
Shurgard raised €575m (£519.7m) in the listing and has put its war chest to good use, spending £50m to buy ABC Selfstore, which has three sites in London.
The investment prospects for self storage are often pegged to the housing market because people take space when they are moving between homes. One reason not to buy now is the residential slowdown that is expected to extend into 2019.
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However, that would be to discount the impact of the thousands of small businesses and entrepreneurs who trade out of their lock-ups. Some 35pc of Big Yellow’s space is taken by business customers. More than half don’t rent anywhere else. What if they begin stockpiling – and more firms join them?
Analysts at Kempen, the bank, are convinced that the company is entering a sweet spot for occupancy and rate growth that should drive high single-digit to low double-digit earnings growth for the next few years. The most occupied branches squeeze out the best rental growth.
Shares in Big Yellow touched record highs not long ago but have given back most of their 2018 gains as the year draws to a close. They still trade at a premium to net asset value but at 19 times next year’s forecast earnings they are worth stashing somewhere safe.
Questor says: buy
Ticker: BYG
Share price at close: 875.5p