Safestore has challenges in store

Can Safestore (SAFE) keep growing? There are many reasons to consider it a safe bet. The self-storage landlord and operator posted a 9 per cent increase in revenue in its results for the six months to 30 April, resulting in a 6.9 per cent increase in underlying earnings before interest, tax, depreciation and amortisation (Ebitda).

The underlying Ebitda figure ignores the valuation hit that Safestore and most of its real estate investment trust (Reit) peers took as a result of last year’s sudden interest rate spike and instead focuses on the operational side of the business. And a lot is happening here. Over the period, the company says it has “opened or extended six new stores, added a further five new developments or extensions to the pipeline, extended the leases on three stores, acquired the freeholds of two stores, acquired an existing store in the Netherlands and entered the German market through a new joint venture with Carlyle”.

In other words, Safestore has been busy expanding its business, and its underlying Ebitda and revenue reflect this. Dig a little deeper, however, and some issues come up. First, underlying and operational occupancy has dropped. The fact that revenues and underlying Ebitda are increasing despite this makes its decrease less of a problem, but it’s something investors should consider nonetheless.

Another consideration should be Safestore’s drop in profit margins. Ebitda margin, store Ebitda margin, and like-for-like store Ebitda margin have all dipped by between 130 and 250 basis points. The company could reverse this weakening efficiency in its next set of results. However, as Stifel analyst John Cahill points out, "Safestore is heavily exposed to the UK consumer and businesses that will feel the pressure of inflation on spending budgets”. Put another way, it’s just as likely that profit margins and occupancy rates will get worse rather than better.

All these question marks may explain why the shares fell 3 per cent on the morning of the results and are trading at a much lower premium to net asset value (NAV) than usual. The market is pricing in the possibility that Safestore’s pace of growth might slow. Some investors could therefore see this as an opportunity to buy in, but we advise caution. After several years of stellar performance, Safestore looks likely to struggle in the medium term. Hold.

Last IC view: Buy, 1,000p, 17 Jan 2023