Lok'nStore (LOK) offers both significant growth potential and a valuation at a sharp discount to its peers. Since opening its first self-storage centre in Sussex in 1995 it has grown its estate to 24 units and two document storage facilities. And there is plenty of opportunity for further expansion given the immaturity of the UK market, which offers only about half a square foot (sq ft) of storage space per person compared with 7.3 sq ft in the US.
- Strong cash flow
- Asset sales to boost 2016 profits
- Attractive dividend
- Low valuation against its peers
- Self-storage use in the UK remains low
- Strong competition for site locations
New openings in the UK were culled in the wake of the financial crash, but the momentum is starting to return. Lok'nStore is busy building up a portfolio of purpose-built storage units, which will soon account for 59 per cent of the portfolio. This is important because in the past storage sites have tended to be tucked away on industrial estates, offering very few, if any, attendant facilities. Lok'n Store has changed the image by locating its stores in prominent positions, well suited to attracting drive-by trade.
Located in the south-east, the company owns the freehold or long leaseholds on 12 of its sites, which it has been extracting value from to fund growth. Its Reading site provides a good example of this. The old store was sold for £4.9m and a superior new store was built right beside the busy road opposite, with a 20 per cent increase in capacity. The new building is fully funded from the sale proceeds. Asset sales will continue to fund development. Indeed, the current financial year has already seen the £3.5m sale of a site in Swindon along with the receipt of a final £2m from the Reading sale. A planning application is also under way at Lok'nStore's Portsmouth site, which should bring in £3m. The business model itself is highly cash generative, with customers paying on a rolling 28-day basis.
Net debt at the July year-end stood at £25.3m - impressive given the continued investment in new sites - and, as a result of a valuation uplift to £88.9m in the company's property portfolio, the loan-to-value ratio fell from 28.2 per cent to a five-year low of 25.8 per cent.
| LOK'N STORE (LOK) | ||||
|---|---|---|---|---|
| ORD PRICE: | 325p | MARKET VALUE: | £85m | |
| TOUCH: | 322-328p | 12M HIGH: | 328p | LOW: 229p |
| FWD DIVIDEND YIELD: | 3.3% | FWD PE RATIO: | 24 | |
| DISCOUNT TO FORWARD NAV | 4% | NET DEBT: | 48% | |
| Year to 31 Jul | NAV* (p) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2013 | 248 | 1.4 | 4.8 | 6 |
| 2014 | 271 | 0.4 | 0.8 | 7 |
| 2015 | 302 | 2.7 | 7.6 | 8 |
| 2016* | 320 | 3.4 | 10.2 | 9.2 |
| 2017* | 337 | 4.5 | 13.3 | 10.6 |
| % change | +8 | +32 | +30 | +15 |
Normal market size: 1,500 Market makers:3 Beta:0.59 *FinnCap estimates, adjusted NAV, PTP and EPS forecasts | ||||
As well as new openings, the company is increasing its revenues by taking on management contracts. As rental income has grown, management has maintained a watchful eye on expenses, with overall operating costs as a percentage of revenue falling from 64.7 per cent to 61.2 per cent last year. The cost of acquiring new sites could become a concern, however, due to competition for prime sites.
The impressive progress being made by the group has been powering the ascent of the group's underlying net asset value (NAV). Despite the growth, the 7 per cent premium to 2015 NAV of 302p looks modest compared with the 35 per cent premium commanded by larger rival Big Yellow and 30 per cent by Safestore. Taking account of the mix between freeholds and leases and the smaller size of Lok'nStore to its rivals, broker FinnCap thinks a 25 per cent premium rating could easily be justified.
