Even as the stock market continues to grind higher, there are still genuinely cheap stocks out there for patient investors to pick through. And one that keeps catching my eye is Safestore Holdings (LSE:SAFE).
With a 5.1% yield, a forward price-to-earnings (P/E) ratio of 13.5, and 16 consecutive years of dividend growth, this self-storage giant looks quietly compelling right now. But is the low valuation a bargain, or a warning sign?
Let’s look at the numbers.
A business finally returning to growth
As a quick reminder, Safestore’s the UK’s largest self-storage enterprise with its empire now starting to extend across Western Europe, including France, Spain, the Netherlands, Belgium, Germany and Italy.
Over the last few years, Safestore has come under significant pressure. Higher interest rates have negatively impacted the valuations of its real estate portfolio while simultaneously making debt more expensive to service.
On top of this, the added pressure on both households and businesses alike has simultaneously dampened self-storage demand. And yet, looking at its latest half-year results, the worst could officially be over.
Earnings are back in growth mode with revenue climbing 6.9% to £120.6m and underlying pre-tax profits climbing by 2.3% to £44.6m. This expansion isn’t obviously explosive. But looking at what’s on the horizon, it could be about to get significantly more impressive…
Why the next 12-18 months could be the real inflexion point
Here’s where it gets genuinely interesting. Safestore has spent several years investing heavily in new store openings, particularly across Europe. When a new location opens, management deliberately underprices its rental rates to attract new customers quicker. And then over a period of two years, those rates are steadily adjusted upwards.
Understanding this ramp-up mechanism is crucial to the bull case because it means all of its new store openings in 2024 are now starting to meaningfully contribute to the bottom line, with 2025-built locations doing the same next year.
Combining this with the pipeline of new locations being built today, management expects to unlock another £30m-£35m of annual profits. And the market doesn’t appear to have priced in this rapidly approaching inflexion point, creating what I think is a potentially lucrative buying opportunity.
Where’s the risk?
Elevated interest rates are still taking their toll on both Safestore’s outstanding debts and its customers. Occupancy levels have encouragingly begun to recover, but they still remain below the pre-inflation levels seen in 2021.
The group’s loan-to-value ratio of 29.1% suggests that Safestore’s balance sheet is far from overleveraged. Nevertheless, higher-for-longer interest rates ultimately compress margins that could delay or prolong the anticipated earnings ramp-up – a real risk investors need to consider carefully.
What’s the verdict?
Safestore’s not exciting like a bleeding-edge AI technology business. But often it’s the boring businesses that go on to deliver the most impressive returns.
With 16 years of consecutive dividend growth already under its belt, a large earnings catalyst in its European store pipeline, and an undemanding valuation, the risk-to-reward ratio for this cheap stock looks quite promising in my eyes.
That’s why I’ve already added Safestore to my passive income portfolio. And it’s not the only cheap income opportunity that’s caught my eye this week…
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Zaven Boyrazian owns shares in Safestore Holdings.
