Lok’n Store Group plc is a self-storage company based in the UK. Lok’n Store operates 22 self-storage centres in the South East of England. They are located in key locations near to main roads and town centres. Total capacity is 1.2 million square feet. 64% of the portfolio is freehold and 36% is leasehold. Lok’n Store also has 2 new sites and 2 replacement sites in the pipeline, which already have planning permissions. The company’s shares are listed on the London AIM Market, classified under Real Estate Investment & Services, and can be found under the Bloomberg ticker LOK:LN
COMPANY MANAGEMENT and TRACK RECORD
The company listed on the stock market on 28th June 2000. The management seem to be honest and open in their communicators and dealings with shareholders. It’s also good to see that the Directors have a significant interest in their company and hold 29% of the issue share capital. There was one recent acquisition in the last 365 days. It was notified on 18th August 2010 that Director Charles Peal purchased 50,000 shares at 87.00p for a value of £43,500.
We looked at the company’s numbers for the last 5 years from 2006 to 2010. In only two years, 2007 and 2010, did the company make a profit after tax. The company has paid a dividend for the last four years. Looking at the efficiency of the company’s capital management we see that things have improved much over the last 5 years. The annual return on capital employed (“ROCE”) has only been positive for 2007 and 2010. The latest ROCE for the year ended 31st July 2010 was only 0.57% and is certainly something which Activist shareholders will be aiming to improve. Although management point to adjusted net assets per share of £2.24, this valuation is questionable if the Group does not even achieve an ROCE of 5%, being comparable to the yield on a long-dated bond.
The preliminary results for the year to 31st July 2010 showed turnover of £10.4, up 4.1% on 2009. Earnings before Interest depreciation tax and amortisation (“EBITDA”) stood at £2.9m, up 19.9% on last year. Operating profit made an even greater swing, rising 196% to £0.92m. The net profit of £0.22m for the year ended July 2010 compares with a loss of £0.56m in 2009. The top line and operating results are little changed from the H1 results to 31st January 2010 which showed revenue of £5.19m, an operating profit of £0.44m, but there has been an improvement on the bottom line, as interest costs have fallen further. The interest charge is down from £1.1m last year to £0.5m this year.
The earnings per share (“EPS”) for the full year to July 2010 were 0.88p (2009: loss per share of 2.39p) and the full year dividend was 1.0p (2009: 1.0p). The Group has provided for a tax charge in the accounts, although none is actually payable due to unused tax losses brought forward. There was £4.2m in tax losses available to carry forward against future profits at the 31st July 2010. A deferred tax asset of £1.09m is recognised in the accounts.
Although the profit margins are still lower than pre-crisis levels these are still a vast improvement on the results of the last trading year. The CEO Andrew Jacobs stated that occupancy was up 4% and prices were up 4.9% demonstrating that self-storage continued to perform well even in a weak economy.
He added that they continue to keep a tight lid on capital expenditure so that cash has increased and net debt has been reduced. Asset values have been increased further reducing gearing and loan to value ratios. Capital Expenditure for the year was only £0.55m, down from £2.35m in 2009. It is important to note that the company has made an annual depreciation charge of £1.8m in 2010 and 2009.
Net debt was reduced by £2.1m to £22.7m and represented 58% of shareholders’ funds at 31st July 2010. Interest is well covered at 6 times. The board stated previously that Lok’nStore had a £40m facility with RBS which runs until 2012.
Of the 22 stores operated by Lok’n Store, 12 were freehold, 7 leasehold and 3 sites were still in development. The freehold are held at a valuation in the balance sheet, which was calculated by a firm of external valuers. The 7 leasehold are held as operating leases and are therefore not reflected in the balance sheets. An operating charge for these leases of £ 1.4m has been charge annually in arriving at pre-tax profit for 2009 and 2010. These have however also been valued externally and have been included in the adjusted net asset valuation which is presented by the company. This valuation report gives a total value for the properties of £70.2m. The sites at Maidenhead, Portsmouth North Harbour and Southampton were not included in the valuation and are added at their cost price of £10.8m to arrive at an aggregate property value of £81m. After deducting the current liabilities, making full provision for deferred tax arising on the revaluations, and adjusting for the treasury shares held by the Group, you arrive at a net asset value of £1.81 per share.
In arriving at their net adjusted valuation for the properties the company have had to make a number of assumptions. For the Freehold properties, one of the key assumptions is that the properties are sold after 10 years. In their annual report the board have compared the UK market with the US market and made it clear that the trading of properties is widespread in the USA where the top 5 operators account for less than 20% of this fragmented market. The UK market is not yet this developed, with the top players controlling 50% of the market, and therefore there are fewer properties changing hands among the storage space providers. As the freeholds represent over 70% of the property valuation this final sale value can be a critical assumption in ascertaining the worth of the shares.
On 24th September 2010 Lok’n Store acquired an option to buy a site in Southend. The site covers 1.2 acres and is near the town centre. The site will provide up to 60,000 square feet of storage space, after planning permission has been obtained and the site is developed.
The Chief Executive Andrew Jacobs believes the Lok n Store is well positioned to grow occupancy and pricing against tightly controlled costs, which should improve EBITDA. The focus will be on driving the cash flow from the existing portfolio. In addition the Board are continuing to examine the portfolio for asset management gains, e.g. by extending the leases on two of the Company’s stores on significantly improved terms.
STAKE-BUILDING by ACTIVIST FUND MANAGER LAXEY PARTNERS
On 12th August 2010 the funds under the discretionary management of Laxey Partners Ltd. increased from 12.4% to 29.04% Lok n Store’s share capital. These puts Laxey and its associates close to a position where they can either make a full bid for the company, or influence the board decision making by vetoing any boardroom decisions which are not to their liking. The previous notification was on 12th April 2010. Laxey’s stake-building had started from zero on 20th November 2009.
WHAT IS THE BUSINESS WORTH?
The economics of the UK self-storage business are sound, as the market remains under-supplied. For example the UK has only 0.4 sq ft per person in comparison with 7 sq ft per person in the USA. The Self-Storage Association claims that the UK market has been growing at 10-15% per annum for the last 10 years. Big Yellow sees potential in the UK for 1.5 sq ft per person. Assuming that this is a 10 year goal, this would imply a growth rate of 14% per annum. We calculated a discounted earnings model to value Lok’n Store, using the brokers’ estimates for 2011 assuming that earnings per share would grow at an annual rate of 14% per annum for the following 10 years. This would value the company at 115p, which represents a potential downside of 12% to the current offer price of 131p.
The last broker recommendation on the stock was from Arbuthnot Securities on 27th September 2010, when they reiterated their BUY and gave a price target of 120p.
Another attempt to value Lok’n Store can by making a peer group comparison with two other listed UK storage companies: Big Yellow Group and Safestore.
The Big Yellow Group has 80 stores, of which 71 are open. Their portfolio will eventually provide over 4.5m sq. ft. of storage space. The majority of the stores are freehold. The company is listed on the LSE. Big Yellow had a turnover of £58m for the year ended 31 March 2010, a pre-tax profit of £10.2m and an EPS of 9.23p. The current share price is 346p, giving the company a market capitalisation of £454m. The adjusted net assets per share at 31st March 2010 were 453p and net debt was £269m. It’s worth noting that Big Yellow converted to a REIT in July 2007. 86% of the company’s revenues are tax exempt.
Safestore’s brokers are expecting turnover of £83m for the year ending 31st October 2010, profit after tax of £18.9m, EPS of 10.08p and a dividend of 5.07p. The share price is currently 126p and the market capitalisation is £236m. The revenue for the 9 months to 31st July 2010 increased by 4.9% compared to last year, which is comparable to Lok’n Store’s growth rate for the year to July 2010. Safestore have 117 stores trading (95 in the UK and 22 in Paris) which will deliver approximately 5.4 million square feet of storage space. The European Public Real Estate Association (“EPRA”) net asset value was at 30th April 2010 was £376m, or an EPRA NAV of 197p per share.
Big Yellow is valued at 7.8 times turnover, Safestore at 2.8 times. Lok’n Store is 3.4 times (based on a market capitalisation of £35m and share price of 131p). It is worth adding here that Lok’n Store’s multiple would certainly be higher, if it had had decent profitability or ROCE ratios like big Yellow or Safestore in past years.
Lok’n Store presents its own valuation as an adjusted net asset value of £1.81 per share. Given that Big Yellow trades at 76% of adjusted net asset value and Safestore at 64%, it seems reasonable that Lok’n Store is valued at 72%.
Finally, Big Yellow is trading at £101 per planned sq. ft., Safestore at £44 per sq. ft., whereas Lok’n Store is valued by the stock market at £29 per sq. ft. This may be one good indicator of the hidden value which the activist shareholders are hoping to extract from Lok’n Store.
We think that buying Lok’n Store means acquiring one of the leading storage companies in a fledgling UK storage market, which is growing at between 10 and 15% per annum. The management have acquired and built a lot of storage space, which is valued very cheaply per square foot against its peers. Return on capital has been poor, but now management are being given notice to deliver a better return on shareholder’s funds, after activist shareholder Laxey Partners raised their stake to just under 30%, which means that they may be preparing to make a bid or put the stock in play. In addition, the stock is fundamentally cheap, trading 28% below its adjusted net asset value and has generated decent net cash over the last year and covered its interest payments 6 times.