Lok'nStore interview: 'A very attractive buying opportunity'

Its share price is up 10% following full-year results, but an 'anomaly' exists whereby Lok'nStore trades at a huge discount to peers. CEO Andrew Jacobs talks to Lee Wild about this and more.

That AIM-listed self-storage company Lok'nStore has been a successful long-term investment is not in doubt. Until recently, the shares would have returned a profit over any time period, with or without dividend income.

However, after peaking briefly at 500p in January 2017, appetite for this highly-rated stock has ebbed and flowed in a sideways range. Yet, buyers have always returned at between 340p and 360p, and they did again a fortnight ago when the October sell-off was in full swing. 

Now, full-year results are a reminder of Lok'nStore's quality, and the shares are up 10% in response to these annual results. But the shares still trade at a massive discount to rivals. 

Chief executive Andrew Jacobs discusses why, and answers our questions in a post-results call.

"These are a great set of results for the financial year ended 31 July 2018. Trading was very good, with revenue up 6.6%. We keep a tight lid on costs, so that feeds through to profit growth [adjusted EBITDA] - 12.3%. Helped by exceptional items [fee from store sale and receipts from warranty claims], operating profit was up 33.9%.

That's helping growth in asset value – adjusted total assets was up 18.2% to £181.4 million. – and net asset value (NAV) per share, a key valuation metric, is up 15% to 480p. 

•    Lok'nStore worth a fiver?

And cashflow was strong. That means cash available for dividends is up 8% at 19.4 pence per share, so we're increasing the dividend by 10% [to 11p], and there's still plenty of headroom to keep moving the dividend ahead.

We have invested in our new store pipeline - over £21 million of capex - so debt is up to £32 million, but with the increase in NAV, that puts a lid on it, so the loan to value ratio is still below 20%. The bank facility has also been increased to £50 million from £40 million, and there's plenty of time to run [up to 2023].

We opened three new stores in the year, three for this year and have acquired five new sites, so there are 13 in the pipeline to take us to 42 sites when they're all open."

Source: TradingView (Lok'nStore, blue; Big Yellow, orange; Safestore, red) Past performance is not a guide to future performance

Funding – will higher interest rates become an issue for you?

Debt funding is all on a revolving credit facility. Last year we paid 1.84% interest, so, at a level where the run rate of EBITDA is £7.3 million and a run rate of interest of £700,000, we have 10 times interest coverage, so there's a huge amount of headroom. 

And we're of the view that rates will stay lower for longer. The only reason they'll rise is if the economy is strong. But then our business would just grow even faster.

Do you see Brexit as a problem?

We're very insulated from Brexit – we have no imports or exports or physical supply chain. We don't have many staff – only 3.5 employees per store, so a tightening labour market will have no particular effect. The only potential issue we see is importing steel for new buildings, but there's nothing on the horizon. The only question is around the rate of economic growth. 

You say the UK self-storage market is still undersupplied. If so, where do you open first? What's the decision-making process?

The limitor on growth is finding the right site. These are in prominent visible locations in busy towns in southern England. We do anything we see that's valid for self-storage. We wouldn't choose between one or another, but a location within the market place drives selection. It must be in a visible location, on a main road, a big roundabout, next to a supermarket. The more boxes it ticks the better.

The big question for Lok'nStore has always been the discount to NAV, or smaller premium than listed peers despite more rapid forecast profit growth. 

It's an anomaly I don't understand. It's one of those things in life. There are anomalies that persist for some while, then that anomaly gets ironed out. At some point it will get ironed out.

Source: finnCap

Interview ends...

There are reason why Lok'nStore trades at a discount to both NAV and its rivals, many of which we're discussed with the business at length over the years.

It's currently capitalised at about £120 million versus listed rivals Big Yellow and Safestore worth well over £1 billion each. Historically, the shares were less liquid, with directors owning around two-thirds of the business and a free float of less than £10 million.

However, the share register is now better quality and liquidity has improved. The store opening pipeline will also add value, which should make Lok'nStore a more attractive institutional stock. The shares also qualify for inheritance tax relief.

Analysts at broker finnCap, are optimistic.

"Self-storage peers are valued at a 37% premium to latest historic NAV. Lok'nStore is valued at a 22% discount to its July 2018 NAV and a 10% discount to 2017, points out finnCap's Guy Hewett. Alongside our forecast of faster EBITDA growth than its peers, we view this as a very attractive buying opportunity.

"We have raised our NAV-based target price to 609p from 521p, factoring in the latest valuation and rolling forward a year."