Big Yellow Group Plc

Big Yellow Group Plc (LON: BYG) is a self-storage Company in the UK. It was founded in 1998 and is listed on the FTSE 250 London Stock Exchange.

On 17 November 2020, the Company will announce the results for the half-year ended 30 September 2020.

Rationale for Valuation – Sell at GBX 1,164.00

• The Company’s Price/Cash Flow, EV/Sales, EV/EBITDA, Price/Book Value and Price/Earnings multiples are significantly higher as compared to the Residential & Commercial REITs industry multiple, reflecting overstretched valuations.
• Presently, the Group is trading near the 52-week high, raising doubts at the upside potential at the current price level.
• The Covid-19 pandemic continued to create material uncertainties for the trading environment.
• In FY20, the profitability margins and ROW were lower than the industry median.
• From the technical standpoint, 14-day RSI stood at ~63.98, which means the stock price could decline in the short term.

Key Risks

• The second wave of Covid-19 outbreak and a potential slowdown in the British economy, jobs cut and shrink in the business activities can hit hard on the Company’s performance.
• The self-storage market might not grow in line with the BYG’s projection and the economic slowdown in the UK could lead to falling demand and a loss of income.

Planning Update (as on 5 October 2020)

• The Company has secured a resolution to grant planning consent at its site in Kings Cross, London, which is for an around 106,000 sq ft store.
• In January 2021, the demolition will commence.
• While, the Company is expected to open the store, which contains a double basement, in Spring 2023.
• For the flagship project, it is expecting costs of approximately £28 million to complete. The total development cost was £52 million.
• From the project of the store, the Company is estimating £4.5 million of net operating income.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company witnessed an impact on demand immediately following the lockdown in March 2020, through a reduction in activity levels and an initial loss in net occupancy. It has few construction projects in the pipeline, which might not give good performance in the near-term, due to the delay of the projects and additional costs. Moreover, the consequence of the macroeconomic impact is still uncertain. The weak economic conditions can also impact the property value further. Furthermore, Brexit and Covid-19 are all presenting unprecedented levels of uncertainties. From a technical perspective, RSI is indicating a bearish setup for the stock, and it is not financially viable to take a fresh position currently. Therefore, it is advisable to book profit as of now, considering global headwinds persisting currently due to COVID-19 pandemic. The stock made a 52-week low and high of GBX 630.00 and GBX 1,245.30, respectively.

Based on the risks associated and factors as discussed above, we have given a “Sell” recommendation on Big Yellow Group at the current price of GBX 1,164.00 (as on 12 November 2020, before the market close at 12:05 PM GMT), while we will look forward to reinvesting at the right time when the market dynamics become favourable.

Secure Income REIT Plc

Secure Income REIT Plc (LON: SIR) is a FTSE AIM UK 50 index listed Company, which generates inflation-protected and stable long-term income from real estate investments.

Rationale for Valuation – Sell at GBX 283.50

• The negative real interest rates continued to impose challenges.
• On a trailing 12 months, the Company’s EV/Sales and Price/Earnings multiples are significantly higher as compared to the Residential & Commercial REITs industry multiple, reflecting overstretched valuations.
• In H1 FY20, the net margin and ROE are in the negative zone.
• The stock has underperformed the index (FTSE AIM UK 50 index) during the last year period and delivered a negative return of around 33%.
• From the technical standpoint, the 200-day simple moving average price is currently at around GBX 298.84, which is higher than the current price and reflecting a downtrend in the near term.

Key Risks

• The potential credit risk from tenant defaults amid recessionary economic conditions.
• Risk pertinent to liquidity and Brexit.
• Change in property valuation due to pandemic.

Financial Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 10 September 2020)

(Source: Company Website)

• The like-for-like portfolio declined by 6% year-on-year, majorly driven by a 5.5% decline in leisure asset valuation.
• It also maintained dividend though the total accounting return fell by 8.0% year-on-year in H1 FY20.
• Adjusted EPRA (European Public Real Estate) earnings per share declined by 37% year-on-year after the full earnings impact of the rent concessions granted.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The easing of over 90% of its leisure and hotel assets has improved the situation. While the future path of the pandemic stays uncertain. Further, the Bank of England has shown a negative real interest rate, which poses a challenge for investors to protect their savings against inflation. Moreover, the property stocks took a hammering as the COVID-19 pandemic took hold. Again, the UK was put on lockdown to stop the spread of the COVID-19 crisis resulting in the enforced closure of several commercial real estate assets, including restaurants, shops, hotels, and leisure facilities. The Company’s share price is trading near its 52-week mid, which raises doubt over its upside potential, and now some profit booking is expected at current levels. The stock made a 52-week low and high of GBX 180.00 and GBX 476.00, respectively.

Based on the risks associated and factors as discussed above, we have given a “Sell” recommendation on Secure Income REIT at the current price of GBX 283.50 (as on 12 November 2020, before the market close at 8:00 AM GMT), while we will look forward to reinvesting at the right time when the market dynamics become favourable.

Empiric Student Property Plc

Empiric Student Property PLC (LON: ESP) is a FTSE All-Share index listed Company, which owns premium student accommodation across the UK.

Rationale for Valuation – Sell at GBX 70.70

• The supply remained restricted, which ensured rental growth.
• The Company has substantial financial resources, and it does not require any refinancing until November 2022.
• The Company’s EV/EBITDA and Price/Earnings multiples are significantly higher as compared to the Residential & Commercial REITs industry multiple, reflecting overstretched valuations.
• In H1 FY20, the Company’s net margin and Return on equity were in the negative zone.
• The stock has underperformed the index (FTSE All-Share index) during the last two years period and delivered a negative return of around 27%.
• From the technical standpoint, 14-day RSI stood at ~77 (overbought zone), which means the stock price could decline in the short term.

Key Risks

• The disruption of Covid-19 pandemic can put operational ability and customer demand at risk.
• The occupancy can be further impacted by decreasing student demand.

Recent News

On 11 November 2020, the Company stated that it had granted a Long-Term Incentive Plan award for FY20.

Business and Trading Update (as on 23 October 2020)

• Despite the challenging trading conditions, at least 70% of YTD occupancy was achieved though booking continued to be lower than the prior years.
• It has a decent level of visibility of booking since students reconfirmed their intentions to occupy the accommodations.
• Regarding liquidity at 30 September 2020, the Company had £48 million of undrawn debt facilities and cash and having no refinancing requirements until November 2020.
• As of 30 September 2020, loan to value ratio was 36.8% while the interest cover ratio covenant was 185% (calculated on an average basis).

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

ESP also has expanded digital marketing activity to target a wider UK audience and reach students as well as parents. It has also appointed new international agents to diversify international student base. The Board decided to cancel the interim dividend to preserve liquidity along with cost-cutting measures. Further, the prolonged impact of the COVID-19 outbreak continued to affect its financial results, plans, operations, outlook, goals, reputation, liquidity and stock price. Also, the outlook for the REITs industry and the Company seems dim in the near-term. The stock made a 52-week low and high of GBX 50.30 and GBX 104.00, respectively.

Based on the risks associated and factors as discussed above, we have given a “Sell” recommendation on Empiric Student Property at the current price of GBX 70.70 (as on 12 November 2020, before the market close at 8:02 AM GMT), while we will look forward to reinvesting at the right time when the market dynamics become favourable.

Picton Property Income Ltd

Picton Property Income Ltd (LON: PCTN) is a real estate investment trust (REIT) company, which is mainly investing in diversified UK commercial property portfolio.

On 18 November 2020, the Company will hold the Annual General Meeting.

Rationale for Valuation – Sell at GBX 73.60

• The operating landscape remains highly volatile with the continuing uncertainty of the COVID-19 pandemic, UK market moving into recession, and categories remaining highly competitive.
• The Company’s EV/Sales and Price/Earnings multiples are significantly higher as compared to the Residential & Commercial REITs industry multiple, reflecting overstretched valuations.
• The net margin and ROE in the past two years were considerably below the industry median.
• The stock has underperformed the index (FTSE All-Share index) during the last year period and delivered a negative return of around 20%.
• From the technical standpoint, 14-day RSI stood at ~83.43 (overbought zone), which means the stock price could decline in the short term.

Key Risks

• The UK is in the transition period (with Brexit). So, there is still uncertainty regarding a future trading relationship.
• In the short-term, the Company’s financial performance is exposed to COVID-19 pandemic, which is causing an unprecedented level of disruption.

Financial Highlights (for the period to 30 September 2020 (H1 FY21), as on 12 November 2020)

(Source: Company Website)

• Over the six months, the Company has delivered a positive total return of 0.7%, but net assets were slightly down from £509.3 million to £505.9 million.
• For September 2020, the rent collection levels stood at 93%, with monthly payment plans and expected to increase as the quarter progresses.
• For H1 FY21, the EPRA earnings were similar to the last year.
• The Company has 22% of the loan to value ratio, with a new £50 million revolving credit facility.
• Subsequently, the Board increase the dividend of 12% to 2.8 pence per share.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

Further, the Company remains uncertain due to the second national lockdown and Brexit transition period. However, the Company has taken the first step in restoring the dividend to pre-Covid levels by announcing an increase of 12%, which will be effective in November 2020. Also, considering the heightened level of uncertainties, the management remained cautious regarding the outlook. Moreover, any change in licensing government can adversely impact on the operations. Furthermore, the disruption in global supply chains amid pandemic and political unrest can affect REIT’s industry. Stock 52 week Low and High were GBX 49.70 and GBX 108.20, respectively.

Based on the risks associated and factors as discussed above, we have given a “Sell” recommendation on Picton Property Income at the current price of GBX 73.60 (as on 12 November 2020, before the market close at 10:02 AM GMT), while we will look forward to reinvesting at the right time when the market dynamics become favourable.

Custodian REIT Plc

Leicestershire, the United Kingdom-based Custodian REIT Plc (LON: CREI) is a real estate investment trust (REIT).

Rationale for Valuation – Sell at GBX 89.30

• The Company’s Price/Earnings multiple is in the negative zone.
• The return on equity (ROE) recorded by the Company in the past two years was considerably below the industry median of 9.3%.
• The Company is closely monitoring the impact of COVID-19 outbreak.
• The stock has underperformed the index (FTSE All-Share index) during the last year period and delivered a negative return of around 24%.
• From the technical standpoint, the 200-day simple moving average price is currently at around GBX 92.60, which is higher than the current price and reflecting a downtrend in the near term.

Key Risks

• The Covid-19 pandemic can massively affect the rent collection, and thus, the liquidity position of the Company.
• The retail and leisure landscape can be impacted by Brexit uncertainties and change in UK government policy.
• Moreover, subdued macroeconomic conditions can affect the demand for investment assets.

Trading Update (for the period from 1 July 2020 to 30 September 2020, as on 29 October 2020)

(Source: Company Website)

• The Company has collected 88% of the rent for the period but rent collection stays impacted by the COVID-19 mayhem.
• For the first half of the year ending 31 March 2021, EPRA earnings per share were 2.6 pence.
• On 30 September 2020, the unaudited NAV of the Company stood at £399.8 million, reflecting around 95.2 pence per share, a decrease of 0.5% since 30 June 2020.
• The Board has approved the dividend per share of 1.05 pence in the period.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

For the current period, the Company reported a decline in rent collection. The retail market has borne the brunt of the impact of lockdown with a massive decrease in footfall and consumers switching to online retailing.  Further, a significant fall in the valuation of the Group’s investment property portfolio could affect profitability. Unavailability to further debt could hamper the operations of the Company. From a technical perspective, the shares were trading below the long-term support level of 200-day simple moving average prices, which reflects a downward trend in the stock. Therefore, it is advisable to book profit as of now, considering global headwinds persisting currently due to COVID-19 pandemic. The stock made a 52-week low and high of GBX 180.00 and GBX 476.00, respectively.

Based on the risks associated and factors as discussed above, we have given a “Sell” recommendation on Custodian REIT at the current price of GBX 89.30 (as on 12 November 2020, before the market close at 9:25 AM GMT), while we will look forward to reinvesting at the right time when the market dynamics become favourable.

*All forecasted figures and Peers/Industry Information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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