36% under ‘fair value’ and forecast annual earnings growth of 6%, should investors consider this FTSE 250 stock?

The FTSE 250’s Big Yellow Group (LSE: BYG) real estate investment trust (REIT) is the UK leader in self-storage. And self-storage usage in the country has more than doubled in the past six years, according to industry figures.

Indeed, last year it hit an annual turnover of £1bn for the first time as 3% of the population used the service. According to industry data, 9% of people are considering using self-storage in the near future.

Having often used self-storage myself in various work-related moves to different countries I am unsurprised by these figures.

They provide a cost-effective and convenient way to store possessions whether someone is relocating for a while or moving house. Future growth is also predicted to come as small online businesses require more space beyond their initial bases at home.

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Growth outlook

A risk for Big Yellow Group is intensifying competition in the sector as its fast-paced growth continues. This may reduce its revenues and/or squeeze its profit margins.

That said, its 19 May fiscal year 2025 results saw revenue up 2% year on year to £204.5m. And adjusted profit before tax jumped 8% to £115.6m. Adjusted earnings per share increased 3% to 57.8p, with the same rise in total annual dividend (to 46.4p). Revenue is a firm’s total income, while profit/earnings is what remains after expenses have been deducted.

The firm expects new store openings “to make a material contribution to revenue and earnings in the reasonably near future”. Specifically, it has a pipeline of 13 development sites and one replacement store totalling over 1m square feet of space. Ten of these are in, or close to, London.

Consensus analysts’ forecasts are that Big Yellow Group’s earnings will increase by 6% a year to the end of fiscal year 2028.

Are the shares undervalued?

The cornerstone of my assessment of any share’s value is the discounted cash flow (DCF) analysis.

This highlights where any firm’s stock price should be, as derived from cash flow forecasts for the underlying business.

The DCF for Big Yellow Group shows its shares are 36% undervalued at their current price of £9.12.

Therefore, their fair value is £14.25.

The growing dividend yield bonus

Last year’s 46.4p dividend generates a yield of 5.1% on the present share price.

However, analysts forecast that this payout will increase to 48p in 2026, 50.7p in 2027, and 53p in 2028.

These would give respective dividend yields of 5.3%, 5.6%, and 5.8%. By comparison, the average FTSE 250 yield is 3.6%.

Will I buy the shares?

Aged over 50, I am focused on stocks with a dividend yield of at least 7%. So, this share is not for me right now.

However, I believe its good earnings growth prospects will drive the dividend higher over time. I also think it will do the same to the share price — towards its fair value.

Therefore, I think the stock is well worth the consideration of investors whose portfolios it suits.

The post 36% under ‘fair value’ and forecast annual earnings growth of 6%, should investors consider this FTSE 250 stock? appeared first on The Motley Fool UK.

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Simon Watkins has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.