Have shares in this £200 million self-storage services company Lok'n Store Group (LSE:LOK) de-rated enough to offer value?
It claims to be the fastest-growing of such UK companies, offering facilities to householders, renters and business users. It now has over 10,000 customers at 42 locations, having started at Horsham in 1995 and floated on AIM in 2000. Management says the industry structure is changing from single-owner sites to larger operators such as Lok’n Store.
While yesterday’s preliminary results to 31 July seemed lacklustre, a £20 million equity-raise that month is said to help set up 11 new stores that will add over 29% to total trading space. It looks a steady process given two new stores have opened in the new financial year and three more are due to open within the next 12 months.
A platform is thus being established for further growth – according to customer demand – just when the stock has fallen back to what appears a long-term uptrend.
Beyond macro volatility, how do fundamentals stack up?
Since the 2008 crisis, Lok’n Store had a terrific run from around 32p in early 2009 to an April 2022 high near 1,100p. They’ve since fallen to 650p versus the equity-raise price at 765p. It appears to have dropped off investors’ radars given no initial reaction to the results, although the stock did edge up 5% to 680p by mid-afternoon.
In a chart context, it marks a level the stock traded at pre-Covid before dropping to 500p before a powerful rally driven by monetary stimulus and speculation. In the last year or so this has given way to “risk-off” sentiment as higher interest rates bite growth shares especially.
Aside from stock market noise, this management team claims to deliver growth in long-term shareholder return through all stages of the economic cycle. Moreover, they argue that a fundamental shortage of storage space exists. Yet the business has not exactly been on a tear given it has been listed over 20 years and is worth just over £200 million based on £27 million revenue, although it does have attractive operating margins above 30% (see table below).
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True, the business does serve an essential need and should not be hard-hit by recession. But if the housing market stays sluggish amid high interest rates, I would anticipate lower demand from the customer segment linked to moving and refurbishing homes. This is quite tricky to decipher from Lok’n Store’s published information, although if it was material then perhaps we should be seeing an impact already. Instead, management cites like-for-like revenue up over 6% for August and September.
Yet the financial summary table shows fairly flat revenue over the 2017 to 2019, then a re-rating, especially in the July 2022 year. There did not appear any transformative acquisition behind that jump. However, Lok’n Store’s evolution seems characterised by progressive if steady expansion of its estate.
It does concern me – from a pure growth stock angle – that recent growth at least, does not appear self-financing. Within only 1% annual revenue growth this last year, net cash generated from operations fell 21% to £13.9 million while property purchases rose 32% to £15.8 million. Consequently, there was need for an equity issue incurring 9% dilution.
Lok'n Store - financial summary
Year-end 31 Jul
|Turnover (£ million)||16.7||15.4||17.0||18.0||21.9||26.9||27.1|
|Operating margin (%)||25.6||33.5||31.1||32.1||34.1||63.8||31.7|
|Operating profit (£m)||4.3||5.2||5.3||5.8||7.5||17.2||8.6|
|Net profit (£m)||3.1||3.8||5.3||3.0||3.3||12.1||4.7|
|EPS - reported (p)||10.6||11.3||10.8||10.1||11.1||40.5||15.7|
|EPS - normalised (p)||10.8||11.3||10.5||10.1||11.4||25.9||0.0|
|Operating cashflow/share (p)||17.4||21.2||29.2||29.9||38.5||58.7||42.2|
|Capital expenditure/share (p)||23.0||74.9||47.7||39.4||89.6||40.1||48.2|
|Free cashflow/share (p)||-5.6||-53.7||-18.5||-9.6||-51.0||18.6||-6.0|
|Dividends per share (p)||10.0||11.0||12.0||13.0||15.0||17.3||19.0|
|Covered by earnings (x)||1.1||1.0||0.9||0.8||0.7||2.4||0.8|
|Return on total capital (%)||3.2||3.0||2.7||2.8||2.7||5.0||1.7|
|Net debt (£m)||17.3||46.8||42.3||50.1||66.5||30.6||11.9|
|Net assets (£m)||89.1||103||117||121||151||205||231|
|Net assets per share (p)||304||349||394||410||510||684||703|
Source: company accounts.
Big discount but pricy according to PE and yield
You could say that this is an interesting business, but that it’s worth letting its stock get cheaper. Will it though?
In its results statement, management benchmarks chiefly against net asset value (NAV) as a financial performance measure. But it’s unclear quite whether that’s because the stock otherwise looks pricy according to price/earnings (PE) ratio and dividend yield.
The stock trades at a 3% discount to the reported end-July NAV per share of 703p. Yet as is quite common in property situations, an “adjusted” figure using external valuers may better reflect commercial value. In this case, 1.4% annual growth to 987p per share implies a 31% discount to NAV.
If that is trustworthy then, yes, the stock’s risk/reward profile is now attractive.
Its PE rating remains high, however. The results statement does not attempt to explain any “adjusted” approach here, citing reported earnings per share (EPS) down from 40.5p to 15.7p. Yes, the July 2022 year benefited from a property sale (where such is accounted for “above the line”) but this implies a trailing PE of 43 times, and even respecting consensus for “normalised” EPS around 27p this financial year, the multiple would be 25 times. So, if PE concerns you, steer clear.
Instead, and after showcasing NAV, management cites a 10% rise in the total dividend, a 12th consecutive year of increases. Yet 19p and with consensus looking for 21p this financial year, the prospective yield is barely over 3%. At least a £42 million cash position underwrites a 19p dividend costing over £6 million, although you could say the equity raise helped bolster payout security (given operational cash flow is down).
Lok’n Store thus falls between two stools of neither appealing overtly as a “growth” share, nor for “value” where buyers are typically searching for income. But if net asset value is the ultimate test of a property-based situation, then it appeals.
For example, and unless whoever wins the next election was to overhaul aspects of inheritance tax, Lok’n Store could be one example of an AIM share to select – say in an ISA – to avoid such liability after two years of holding. Mind, you need to make further investigation to be sure that it qualifies.
It also shows how AIM is not necessarily a gambling den of highly speculative shares, and that there are some well-established businesses.
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Strong 31 July balance sheet to withstand UK recession
Lok’n Store’s property element advanced 7% to £314 million versus £54 million debt (down 18%) and near £15 million leases, yet £42 million cash also.
Leases are involved because, within 26 “owned” stores, 17 are freehold and nine leasehold where the average unexpired term is near 13 years. The group also operates a further 16 stores under management contracts, taking the total to 42.
The interest charge rose from £1.3 million to over £3 million due to higher interest rates, and business rates rose by around £0.5 million a year with a further £0.2 million expected from April 2024. Yet the chief cost rise was energy, up £1.2 million, which management expects to “abate” in the coming year then “decline in 2025,” although I suspect war in the Middle East will be a factor. It is quite a reality check how businesses are still combating inflation. Lok’n Store still contends an extent of pricing power as “shelter against these external cost increases”.
At least a ‘hold’ stance applies
While I do not yet recognise a conviction “buy” case, the share price decline puts Lok’n Store back on my radar for emerging value in a decent business.
I still cannot exclude the possibility that a housing market slowdown tempers demand for storage space such that revenue falls, given this company’s pedestrian record. A true cynic might say that this could be offset by more divorces in a recession, household contents splitting up and needing separate space.
At some risk of my being cute: 2024 might offer even better pricing. Hold.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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