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The National Storage share price is down more than 5% in 2019: is it a buy?

The National Storage REIT (ASX: NSR) share price is down 5.4% in 2019 so far, and I think it’s a good time to buy.

Background on National Storage REIT

National Storage REIT is a provider of storage solutions. The group offers self-storage, business storage, records management, wine storage, vehicle storage, packaging, insurance and vehicle and trailer hire. The group boasts a total of 77,000 storage units in Australia and New Zealand across 146 centres. It has a market capitalisation of $1.3 billion.

Why I think it’s a buy

National Storage REIT has a price-to-earnings (P/E) ratio of 6.15x, versus the ASX 200, which has a P/E ratio of 18.25x. Underlying earnings, which is earnings before one-off items, were up 17% in the first half of the 2019 financial year on the prior year period. According to guidance, underlying earnings for the full year are set to be up 25%. These continued improvements in underlying earnings are likely to translate to higher reported earnings.

The group offers a dividend yield of 5.7%, which comes unfranked. This is a healthy return at the present interest rate and offers investors some compensation as they wait for the group to post higher profits. Dividends are paid from the underlying earnings and the group is generating plenty of cash flow to continue paying distributions to shareholders. The group reported a healthy cash balance of $53.5 million in its half-yearly report.

The group is currently expanding and has been raising capital to do so. As expansion projects become profitable, their accounting value will contribute more to the net tangible assets of the group. This will help with reported earnings and the group stated in its half-year report that this should be significant. Indeed, despite raising capital recently, net tangible assets per share increased in the first half of the 2019 financial year. As the group starts experiencing increased earnings growth, the share price should attract a rerating.

The group did have a debt-to-equity ratio of 58.9% at the end of the first half of the financial year, and has increased its debt level due to expansion. However, given that the group’s main assets are properties, this can be considered manageable.

Foolish takeaway 

The National Storage REIT has improved underlying earnings and is likely to start generating higher profits soon as its expansions add value to the business. It has a good dividend yield and manageable debt. I think it’s a buy.

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Motley Fool contributor Chris Chitty has no position in any of the stocks mentioned. The Motley Fool Australia has recommended National Storage REIT. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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