Interactive Investor

Lok'nStore tipped to eliminate big discount to peers

24th April 2017 14:31

David Brenchley from interactive investor

Cash-generative companies with robust balance sheets and a progressive dividend policy are highly prized by investors, and self-storage unit provider Lok'nStore has been just that for a number of years.

And the AIM-listed firm continued its impressive progress in the first-half, reporting strong trading and cash flow with revenue up 4.5% to £8.34 million in the six months to 31 January, driving adjusted pre-tax profit up 13.5% to £2.1 million.

It continued to improve its balance sheet by raising £7.9 million from the sale of almost 2 million treasury shares, bought for an average of 150p in the depths of the financial crisis, to institutional investors at £4 a pop.

This allowed the company to reduce net debt by 35% to £16.7 million, as well as improve liquidity. The loan-to-value ratio also fell to 14.4%, from 26.2% in the first half of 2016.

Cash available for distribution climbed 6.5% to £2.62 million, allowing the firm to raise its interim dividend by 12% to 3p per share. According to house broker finnCap's estimates, the stock will yield 2.2% in full year 2017, rising to 2.6% in 2019.

Having opened four new landmark stores last year to add to the three the previous year, Lok'nStore continues to have "a healthy pipeline" with a further four stores to be opened in the coming months. That's consistent, though chief Andrew Jacobs told us the company's balance sheet would accommodate an "unlimited amount of new sites".

While around two-thirds of available space is occupied currently, this number is skewed by the fact that some stores have been open for 22 years and some just six months. They remain highly profitable, though, Jacobs told Interactive Investor, with break-even on its landmark stores around the 25-30% occupation rate mark.

Since the financial crisis, during which Lok'nStore shares slipped to an all-time low of 36p, the firm has grown as much as fourteen-fold and, while it's been unable to breach the 500p mark so far, finnCap reckons it will.

Analyst Guy Hewett has raised his target price to 510p from 478p previously, implying potential upside of 15%. That price, he says, would remove the discount to peers at which Lok'nStore currently trades. Its 21% premium to historic net asset value (NAV) compares to the 32% premium the likes of Big Yellow Group and Safestore trade at.

Still, a forecast 2018 price/earnings (PE) multiple of 30 times seems steep and investors were happy to take profits Monday, selling the shares down as much as 6% to 435p.

Bar a couple of sojourns above and below, the stock has been trading within a range of 400p to 480p for the past six months, having climbed 80% in the second half of last year from a 15-month low of 265p in early July.

"Lok'nStore's results confirm continued good progress in its strategic development," explained Hewett. "The existing stores continue to fill, the newly opened stores are trading well, and new opportunities are being secured.

"Against the backdrop of a structural undersupply of self-storage in the UK, and supported by a strong balance sheet, we continue to see strong growth prospects for the group."

That PE ratio may look aggressive, but earnings per share (EPS) is expected to grow deep into double digits for at least the next three years, it's opening successful new stores, and Lok'nStore has always been adamant that its discount to peers is unwarranted.

Chief executive Andrew Jacobs agrees. Back in 2015, with the share price at 300p, chief executive Andrew Jacobs told us: "We trade at a heck of a discount to our quoted peers and yet we are growing our business, which those guys aren't, so we find ourselves in an interesting position."

And there is reason to be confident in management's predictive abilities. Just six months ago, chief financial officer Ray Davies told Interactive Investor that if the market were to value his company in the same way, "the shares would be worth around £5".

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.