Lok'nStore has plenty of room to grow

There's nothing wrong with Lok'n Store's half-year numbers. In fact, revenue growth of 13.6% to £7.63 million and a 34% surge in adjusted cash profit to over £2.9 million was enough to spark another round of earnings upgrades. The shares have come a long way in the past few years, but there's still a substantial valuation gap to peers in the self-storage sector, the argument for which looks increasingly hard to justify.

Even after rallying Monday to an eight-year high, Lok'n Store shares still trade at only a tiny premium to adjusted net asset value (NAV) of 269p. Larger listed peers Big Yellow and Safestore are currently valued at premiums to historic NAV of 47% and 29%, respectively.

We've pointed out the anomaly before, back in October with the share price at 215p, then again in February at 251p. Much of the problem is historic. Its rivals are much larger and listed on the main market, and liquidity was an issue for Lok'n Store a few years ago. Then, directors owned two-thirds of the shares and free float was about £10 million. Now, it's more like £50 million, and rising.

There's also an argument that Big Yellow and Safestore's REIT status is more attractive for investors. However, Safestore's premium to NAV has had no significant uplift since it became a REIT in 2013.

Clearly, the magnitude of this valuation gap appears undeserved. Guy Hewett at house broker finnCap certainly thinks so. "Due to the growth potential from self-storage and strong long-term cash characteristics we believe a premium to NAV is appropriate and have set our new target price for Lok'n Store of 339p at a 25% premium to historic NAV."

Hewett upgrades sales for the year ending July 2015 by 2% and EPS by 7% to 7.5p, rising to 9.9p next year and 13p in 2017. That represents average annual earnings growth of 32% for 2016 and 2017.

First half sales were driven higher by a 5.5% increase in self-storage occupancy and better pricing, up 6.7%. Management has a very tight grip on costs, too, and a substantial store opening programme will feed through to numbers over the next year or two.

Maidenhead and Reading stores are already up and running, and trading well. They'll grow a lot faster than the rest of the portfolio, too. A store in Aldershot opened today, and others in Bristol, Southampton and Chichester will be open in under a year.

There's also a prospective dividend yield of 3%.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.