Rabbit-hutch syndrome has been a boon for Safestore since its creation in 1998. The reduction in new home sizes, fragmentation of households and the sheer accumulation of stuff has created huge demand for self-storage space (Patrick Hosking writes).
Safestore, with its 170 centres, mostly in the UK but with a presence in France, Spain and Belgium, has harnessed that demand, turning it into a £1.6 billion FTSE 250 company with a strong shareholder following.
Interim results yesterday demonstrated its appeal. The six months to April, which included weeks of lockdown, proved resilient. Like-for-like revenues grew 5.9 per cent. Underlying occupation was up by 3.7 per cent. The company was also able to raise prices modestly.
The pace of customers taking space and customers vacating old spots plunged at the start of the lockdown but has rallied since. Customers late with their rent have crept up, but not enough to worry the management.
All stores were kept open through lockdown, though reception areas were closed to meet distancing rules. No one was furloughed. Self-storage was classified as a key industry.
Frederic Vecchioli, chief executive, says customer inquiries in the first two weeks of June were up by 17 per cent on a year ago, which compares to a normal year-on-year uplift of 10 per cent to 12 per cent. Strip out the distorting effect of students, whose academic years effectively ended in March rather than June, and the inquiry surge was more like 38 per cent.
Pent-up demand has perhaps been boosted still further by a wave of stay-at-home workers reconfiguring their homes and needing to find space for the surplus stuff.
Underlying earnings per share, the company’s favoured measure of performance, rose 7.4 per cent to 14.5p and the interim dividend was up 7.3 per cent to 5.9p.
The pre-tax profits line, which rose by 161 per cent to £99.7 million should be treated with scepticism. It includes £68.6 million from the rising value of Safestore’s freeholds and leaseholds. Even the valuers, Cushman & Wakefield, accepts there is a “material uncertainty” about these estimates.
The balance sheet looks robust. Loans relative to the value of property are 30 per cent and interest cover is a comfortable 8.6 times. It has unused bank facilities of £158 million and no borrowings to refinance before June 2023.
The results were well received, with the shares marked 44½p or 6.2 per cent higher to 762½p.
There remain niggling questions however: how sticky will customers be if there is a prolonged recession? Will clients still be prepared to pay £600 a year to rent a space the size of a medium-sized car boot? To what extent is self-storage an essential for households facing possible redundancy and small firms, which are also big customers, facing the urgent need to cut costs? Will they instead tolerate more clutter or cadge space from friends and relatives instead?
After the financial crisis in 2008-09, occupancy at Safestore fell by 6 or 7 per cent before recovering quickly, so last time it did prove pretty resilient.
Peel Hunt, the broker, which has the shares as a “hold”, says it wonders what might happen in the fourth quarter when the furlough scheme supporting nine million people is wound up.
The other question is whether Safestore has enough of a “moat” to justify its pricey valuation. It trades on a spicy 24 times earnings and yields 2.5 per cent. Yet the barriers to entry to this relatively simple industry are low. Without a more widely recognised brand, the benefits of scale seem relatively modest too.
ADVICE Sell
WHY Priced too high for a business with little competitive advantage
Hornby
This was supposed to be Hornby’s year. The faltering model railway business claimed it had “fixed the engine” and was ready to motor ahead with new product launches to toast its centenary year. Then the pandemic hit (Ashley Armstrong writes).
Lockdown, however, has boosted the business as families have returned to assembling Scalextric kits, building old railway systems and dusting off their slot car racing sets to keep themselves entertained at home. As a result, the company says that sales during the outbreak have been in line with expectations, driven by more people shopping online.
Other retailers, including Games Workshop, have reported a surge in sales of board games during lockdown. However, despite rising demand from hobbyists Hornby is a long way from replicating Games Workshop’s success or its £2 billion valuation.
The group, founded by Frank Hornby in 1901, is valued at just £60.3 million and has not made a profit since 2012. Hornby yesterday reported that sales had grown 15 per cent, from £32.8 million to £37.8 million, in the year to the end of March and it has narrowed losses from £5.3 million to £3.4 million.
Lyndon Davies, chief executive, admitted: “A loss is still a loss, and it has been paid for by shareholders. I will not rest until we reach sustainable profitability; I live and breathe for that moment and beyond.”
His typically frank analysis reveals that Hornby has to increase sales rapidly to over £50 million in order to cover the group’s steep cost base. Its efforts to reduce inventory levels have also backfired as it brought forward orders at the start of the year and its stock costs are double what they were 20 years ago. In March Hornby raised £15 million from investors to fund the manufacturing of new model sets and it now has £5.9 million of cash on the balance sheet, which it says should give it enough liquidity to weather the crisis.
Hornby is in a better position than four years ago but it is unlikely to achieve the sales needed to return to the black in the next year. While its train sets are collectors’ items, its shares may not be.
ADVICE Sell
WHY It is still on a long journey to make a profit
