Our view Buy
The traditional view of storage companies like Safestore is that they struggle when the housing market's in a trough because people stop moving. Rather like now.
So one might ask what on earth the company has been doing opening up new sites left right and centre over the past couple of years. Unless it's just one of those rare businesses that has cottoned on to the fact that companies which spend during downturns generally win big when things pick up.
But Safestore is about far more than just the housing market, and a stock this cheap – it trades on a discount of just under 50 per cent of the 2012 forecast net asset value per share – is worthy of investigation.
The company has been winning through investing heavily in targeting "national account" customers. These are big companies which might previously have used their own depots but now rent space because it is more economical.
Safestore has put money into branding, internet sales and establishing calls centres, and these tactics appear to be bearing fruit, with the "national account" numbers rising by an impressive 48 per cent in the third quarter of this year compared with 2011.
That looks like a very sensible move, given that the company has some bad news for individual customers. The VAT man has decided to target self storage. Safestore and other operators are planning to challenge the decision. They even think they have reasonable grounds. Good luck with that.
Safestore has options here: it could chose to eat some or all of the tax, leaving prices more or less static for consumers, or it could pass it on.
The net cost of the former option would mean the company taking a £12m hit – more than its entire wage bill. So prices for the ordinary consumer are going to rise.
The impact of this should hurt Safestore less than some of its rivals. The tax rise will hit about 20 per cent of its consumer base. The remainder are those national accounts, smaller, VAT-registered businesses which can claim the tax back, and a Paris-based business which is unaffected.
The latter is actually doing surprisingly well, despite the steady flow of grim economic news from the eurozone. Paris generally outperforms the rest of France (as London does in the UK) and yesterday's trading update demonstrated that this is one of the better performing parts of the business overall.
UK revenue per available foot of space was up by 3.5 per cent for the third quarter of this year compared with last year. In Paris, that number was 5.9 per cent.
Don't get too excited just yet. The euro's weakness is still a problem. Overall revenues grew 3.4 per cent to £24.9m in the third quarter. Growth would have been 5.7 per cent had the euro not dived.
The third quarter showed a slowing of growth (year-to-date revenues grew 5.4 per cent or 6.5 per cent at constant currency). The company has also seen a slow start to the fourth quarter. The Olympics and Paralympics didn't help the important London business.
Safestore is now hoping measures like offering long-term customers cheaper rates while charging short-termers more will lock in business, and the strategy for now is filling the space available in the new centres rather than opening more new sites.
I'd be a little concerned about the outlook, were the shares not on such a rock-bottom valuation. They also offer a pleasing prospective yield of 5 per cent.
These shares may offer a bumpy ride over the next few months. The company has plenty of challenges. But that discount suggests that even if the shares ease back a bit, they won't fall far.
Safestore's stock market ticker symbol is safe.l. There's no such thing as a truly safe investment in the current climate, but Safestore looks solid and the valuation is compelling. Buy.