Storing Up Potential For Growth

Published in Company Comment on 7 March 2011

Increasing demand for storage solutions could boost this company's growth.

This week, my search for solid companies with a good track record, room to grow, and a reliable and growing dividend yield, has taken me to the FTSE Small Cap Index. Mind you, I wouldn't describe this company as a tiddler, sporting as it does a £274m market capitalisation.

It describes itself as the "UK's largest and Europe's second largest self storage provider," and it goes by the name of Safestore Holdings (LSE: SAFE). 

It's a company that does what it says on the tin, and if you want a rapid appreciation of what it can do for individuals and companies, it's a good idea to take the virtual store tour that's available on the company's website (with the sound up!)

In, out

I think you'll agree the website looks very polished, and geared to making sales efficiently. That's what I like to see in companies that make potential investments: it's got the appearance of a business that has been successful, looks to have learnt how to optimise the execution of its operations, and has developed a recognisable and marketable brand.

To my way of thinking, by picking established and apparently hitherto successful enterprises to invest in, I'll have a pretty good chance of minimising the downside. The belt to my braces is that businesses like this one, have just survived the worst recession in a generation.

However, the company's fortunes haven't always been forged in the public arena. For example, in 2003 it delisted from the AIM market, and was the subject of a management buyout. It wasn't until 2007 that it then listed on the main market of the London Stock Exchange at 240p per share.

Shake it all about

During its years in private hands, the company experienced what it describes as "transformation" when it acquired four other businesses and increased its store count from 24 to 99. Today, it operates 118 stores, 22 of which are in and around Paris with the rest in the UK.

To put that into perspective, the business owns around 5.2m square feet of lettable storage space, with around 3m square feet currently occupied.

What I find interesting is the performance of the business since its 2007 appearance on the main market. To iron out the affect of property value fluctuations in its net profit figures, I've concentrated on operating profit that has been adjusted to remove the property element, and cash flow, for an indication of performance in this table:

 2007200820092010
Revenue (£m)74838489
Operating Profit (£m)41454748
Net cash from operations (£m)26282528
Dividend per share4.5p4.65p4.65p4.95p
Net cash return on equity10%11%10%10%

Revenue profits and cash flow have all held up well through the recent economically tough years and the business has returned a reasonable return on equity through that time. This has all translated into a steadily rising dividend.

Having said that, the company appears to be pumping most of its cash into the improvement, maintenance and expansion of its property portfolio and has a pipeline of stores under construction valued at £18m. Also to that end, there is a fair chunk of debt with gearing of about 140% if you include stuff like finance lease commitments, too.

The hokey cokey

It's clear that the business has plenty of capacity for expanding its turnover and in the latest guidance released on 17 February, the CEO said:

"We are confident that Safestore, as market leader, is well placed to take a bigger share of the overall market through our operational expertise, national coverage and scale and is ideally placed to exploit any potential opportunities."

So with economies on an upward improving trend, it's easy to imagine the housing market picking up, for example, with a resulting increase in demand for the services of companies like Safestore.

Meanwhile the latest balance sheet shows net tangible assets of around 144p per share which compares well to the share price of 149p as I write. 

In fact, it's tempting to think of the business purely as a property company when the market capitalisation is so well supported by the asset valuation. However, to do so might underestimate the strength of the business model and its potential to deliver greater profits in the event of higher occupancy rates, in my view.

It's useful to compare net cash from operations, which is derived after interest payments, to the market capitalisation. If you do that, the ratio is around 10 suggesting a fair valuation for the operating business. There is also a historic dividend yield of about 3.3% to keep investors company.

Turn around

There is change afoot at Safestore with a new CEO taking charge after the recent retirement of his long serving predecessor. That could unsettle investors, especially since the outgoing boss presided for around nine years and guided the business through its recent growth.

On the other hand, it looks like he has left the company in good shape and my guess is that the business might do well for investors over, say, a five year investment horizon if it can continue to gain market share and fill its spare capacity, perhaps due to rising demand as economies continue to recover.

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Comments

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BarrenFluffit 07 Mar 2011 , 9:16pm

Safestore is bigger than Big Yellow? I'm out of touch.

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