Lok’n Store (LSE:LOK) this morning released record results for its financial year ended 31 July. The shares are up 3% to an all-time high of 380p, valuing the AIM-listed self-storage firm at £101m.
The results reaffirm my confidence in the bright outlook for Lok’n Store, but also reveal, en passant, one of many factors pointing to a far less rosy future for Royal Bank of Scotland (LSE: RBS), more of which shortly.
What a CAD!
Lok’n Store reported a 4.1% increase in revenue to £16.06m. Disciplined management kept operating costs at around the same level as last year, so margins improved, feeding through to a 15.8% rise in adjusted earnings per share (EPS) to 9.08p.
On the face of it, the shares appear expensive at a price-to-earnings (P/E) ratio of 42. However, I prefer to look at what the company calls cash available for distribution (CAD), which is cash after finance costs, tax, maintenance and new works team expenses. This increased 17.7% to 18.1p, so while the P/E is 42, the P/CAD is 21 — a reasonable valuation when considered against the rate of CAD growth.
The company’s primary objective is to deliver value for shareholders through increasing CAD and dividends, and the board lifted this year’s dividend by 12.5% to 9p (so, twice covered by CAD), giving a running yield of 2.4%.
I’m expecting CAD and dividend growth to continue apace, partly as a result of expansion (the company has already acquired sites for a further four new stores, which will add 14% to trading space) and partly as a result of a new £40m five-year banking facility on much improved terms.
The margin on the new facility is LIBOR plus 1.40%-1.65% compared with the previous LIBOR plus 2.35%-2.65%. The non-utilisation fee and arrangement fee have also been significantly reduced, so there’ll be a large saving over the life of the facility.
Lok’n Store’s balance sheet is robust, gearing is conservative, and the prospects for high CAD and dividend growth lead me to rate the shares a buy.
A stock to avoid?
The new loan facility is great news for Lok’n Store, but not so good for the provider of the facility — Royal Bank of Scotland. Low interest rates and high competition aren’t good for banks’ profits, and this is the prevailing situation in the UK for the foreseeable future.
In addition to the difficult trading environment, RBS is disadvantaged by having more profit-sapping legacy issues than its peers, while investor sentiment is also likely to remain subdued by the ongoing lack of headway in returning the government’s bailout stake in the bank to private hands.
Over the years since the financial crisis, City analysts’ forecasts for RBS’s recovery have been put back time and time again. This year’s no different. Twelve months ago the consensus forecast for 2016 EPS was about 25p. Today, it’s less than half that level. Hopes that RBS might be in a position to restart dividends have also once again been put back.
The current earnings consensus for 2016 gives a P/E of 13.8 at a share price of 170p. For 2017, the P/E falls to 10, which looks appealing but would prove to be deceptive if analyst forecasts were to go the same route as in previous years. As such, until the trend in earnings downgrades reverses, I can only see RBS as a stock to avoid.
