Lok’nStore CEO Jacobs on the unrealised value in Britain’s emerging self-storage sector (LOK)

Self-storage firm Lok’nStore Group (LSE:LOK) currently sits at 415.5p a share, having shot up last month after revealing strong turnover and impressive dividend growth in its latest annual results. Alongside this stable footing, the business also unveiled an extensive pipeline of 13 new stores that are expected to increase its operating space by nearly a third over the next three years.

With shares still sitting well below highs of 485p hit in May, CEO Andrew Jacobs explains how Lok’nStore’s economic resilience and under-penetration in the UK self-storage market are further boosting its prospects.

Lok-up

Lok’nStore offers self-storage lockups and serviced document storage at almost 30 centres located in large towns and cities in the south-east of England. Around one-third of the company’s revenues are generated from business customers, while the remaining two-thirds comes from household clients.

According to Lok’nStore, reasons for using self-storage are highly variable. On the household side, a customer’s need for a lock-up is usually driven by a so-called ‘life event’. This can include things like a house sale, a divorce, or a death in the family. Meanwhile, business customers may require a lock-up for storing excess stock when they are growing or housing equipment following efforts to downsize in a period of difficulty.

Jacobs tells us that the widely varied needs of Lok’nStore’s customers provide the firm with a great deal of insulation against macro factors like economic growth, political change, and, of course, Brexit:

‘There is a common misconception that the self-storage sector’s performance links directly to the strength of the UK housing market. I.e. when more people are moving house, more storage units are needed. Although this may be true, moving house is just one of many life events that may lead someone to rent a lock-up. This means that we are not reliant on any one factor like economic growth, political change, or, of course, Brexit. This allows us to deliver very consistent performance and growth.’

Growth potential

As it stands, there are an estimated 1,505 self-storage facilities in the UK, providing 44.6 million square feet of storage space, an increase of 8.2pc on 2017. Of this, Lok’nStore offers 29 stores providing 1.4 million square feet of space, making it the country’s fourth largest operator.

With the UK’s population currently sitting at 65.2 million people, the British self-storage market presently offers around 0.7 square foot of space to each member of the public. Meanwhile, in the US there is roughly 9.3 square feet of self-storage space per person while in Australia there is approximately 1.8 square feet per person.

Jacobs says the reason for this contrast is that the UK self-storage market is much younger than its peers, with facilities being introduced in the US around 20 years before the UK. It takes a considerable amount of time to find, secure, build, and market each site, meaning the sector’s growth is by no means an overnight process.

Handily, adds Jacobs, this dynamic means the UK market is likely to still have plenty of growth headroom. With large operators now owning or managing around 30pc of facilities and taking a 40pc market share by revenue and space, he believes Lok’nStore will be one of the biggest beneficiaries as this unfolds.

‘The UK market is clearly still relatively immature, and we are opening a number of new stores in the right trading locations to take advantage of this. This is where we believe we create the best value for shareholders in the sector. What is even more encouraging is that the more mature markets continue to rapidly grow. I was recently at a self-storage conference in the US, and an American operator said that 50 new centres are planned in Denver despite the area already offering around 300 facilities. The fact that this market can continue to grow at such a high rate despite being far more advanced than the UK market in which we operate is very exciting.’

Fired up

Last month saw Lok’nStore demonstrate this growth in action with the release of its results for the year ended 31 July 2018.  The figures, which led the firm’s shares to shoot up by 10.2pc, showed group revenues of £17.8m, up 6.6pc from £16.7m in 2017. They also included adjusted EBITDA of £7.3m, up 12.3pc on 2017, and operating profits of £5.7m, a 33.9pc increase on the previous year. Elsewhere, it announced its seventh consecutive annual dividend increase, from 10p to 11p per share, and an adjusted net asset value per share of £4.80, up 64.4p on £4.16 in 2017.

Lok’nStore put this strong performance down to several factors including efforts to fill existing stores (self-storage unit occupancy rose by 7.7pc), and improved pricing, with charges increasing by 0.5pc over the period.

Perhaps most importantly, it also said its progress was driven in part by the opening of three new landmark stores in Hemel Hempstead, Gillingham, and Wellingborough. With these stores trading above expectations and accounting for 29.2p of the increase in Lok’nStore’s NAV per share, Jacobs tells us the firm is generating strong value from new sites as it expands:

‘Excitingly, our most recently-opened stores have filled up at the quickest rate we have ever seen. We think this shows that the UK market for self-storage is still in its infancy, with low penetration and increased consumer awareness leading to more appetite. The fact that these news stores contributed such a significant amount to our performance shows how much value we are adding to the table through our expansion plans.’

Growth pipeline

The results also saw Lok’nStore update investors on its ongoing efforts to develop further. As of the day of the results’ release, the firm has a pipeline of 13 new sites, which will increase its operating space by 32.4pc over the next three years. Of these, six are scheduled to open in 2019 and three in 2020. It is progressing the remaining four through the acquisitions progress. Jacobs tells us that investors should expect more of the same once this growth pipeline is exhausted:

‘We have put our foot on the accelerator, so more stores are to be expected. Each new site is a profitable business unit, so to expand we need to build more of them without stretching our balance sheet too much. The chief constraint is finding the right site. Ideally, there are a lot of potential new places in the geographic area we currently focus on, but as we continue to grow, we will likely have to move into new areas.’

Lok’nStore’s accelerated expansion efforts have obviously had some impact on its balance sheet. Last year, its capital expenditure rose to £21.9m from £6.3m the year before while its net debt increased from £17.4m in 2017 to £32.3m as at 31 July 2018. Meanwhile, its cash balance fell from £11.4m to £5m.

With this in mind, to ensure it can maintain its new expansion rate, Lok’nStore has increased its £40m banking facility with RBS by £10m to £50m. It will also use the money as working capital for existing sites. Encouragingly, Jacobs tells us the facility is unlikely to affect Lok’nStore’s progressive dividend policy:

‘I do not think that opening more stores means we will have less opportunity to increase our dividend. We have plenty of headroom in our cash available for distribution, and the strong performance of the business means we have plenty of headroom on our banking facility. We can keep growing the dividend at 1p a share for a very long time, even if we are expanding very quickly. Most of the finance for the new stores comes out of the bank facility. Operating cash does contribute, but it is a smaller part of the equation.’

Skin in the game

Over the years, the sturdy footing and commitment to increasing dividends most recently re-iterated in Lok’nStore’s latest results has enabled it to establish an impressive shareholder register.

Indeed, the company’s management owns around 30pc of its shares, with Jacobs himself holding an 18.7pc stake as at 31 July 2018. At today’s share price, this position is worth more than £20m. A day after the release of the firm’s results, shares rose a further 8.6pc on the news that group sales director Neil Newman-Shepherd has bought c. £21,000 worth of shares, increasing his stake to 0.05pc.

Meanwhile, another third of its shares are held by institutional investors, with well-known names like Miton AM (9.3pc), Canaccord Genuity (5.56pc), and Slater Investments (4.2pc) all owning considerable stakes.

Jacobs believes this skin-in-the-game and City support should be a major consideration for potential retail investors:

‘I personally own about 20pc of our shares, so equity dilution risk is very low. Indeed, we have not issued any new equity since 2001. If you look at the amount that has been returned in dividends relative to the equity since then it translates into a very equity investor-friendly calculation.’

Solid performance

Lok’nStore offers an effective, all-weather business model well-positioned in a sector potentially poised for some serious growth. The company’s most recent results continue a long track record of strong performance and dividend growth, and the fact that its shares were rewarded so handsomely in the market is highly encouraging. With this much investor support behind it, Lok’nStore could offer a reliable source of income and growth in a small-cap world defined by volatility and high levels of risk.

Author: Daniel Flynn

Disclosure: The author does not own shares in the company mentioned above

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