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THE BUSINESS
By number of stores Safestore (SAFE) is the UK's largest and Europe's second largest provider of self storage space. Its portfolio of 104 stores, which are a mixture of freehold and leasehold, are mainly located in the UK, with 84 units (including 3 business centres) in the country complimented by another 20 stores located in Paris trading under the name of Une Pièce en Plus. Safestore is strongly focused on growing its business and aims to add between seven and ten new stores to its portfolio every year.

Driven by factors such as a fall in the average size of housing and an increasing number of homes being built, the market for self storage is set to grow steadily over the coming years. The UK Self Storage Association estimates that the market will grow at a compounded annual growth rate of between 10% to 15% up to 2010. In addition Citigroup forecasts a further 7% growth per annum up until 2020.

The company sells its storage space to both domestic and business customers. Demand from domestic customers comes from the need for storage during house moves, renovation works and sheer lack of space. Businesses on the other hand may require extra space for stock, archiving documents or just for flexibility purposes.

FINANCIALS
Driven by increased improvements in the company’s three key drivers - occupancy, income per square foot and ancillary revenues such as sales from insurance and packing materials - Safestore saw its total revenues grow by 15.5% to £74.3 million, with like-for-like sales increasing by 14.1% to £72.6 million in the year to 31st October 2007. Occupancy rose by more than 200,000 square feet, or 7.4%, to 2.91 million square feet, the average rate per square foot increased by 8.3% to £21.56, and ancillary revenues were up by 23% to £10.4 million. Combined with tight cost controls the company saw a 21.7% increase in EBITDA before exceptional items and investment gains of £40.7 million.

Safestore made a gain on its investment properties of £81.3 million over the year. As a result (including this figure in the numbers) the company made a profit after tax for the year of £78.2 million, up by 73.2%. Adjusting for the investment gain, exceptional items and associated tax, earnings per share more than doubled over the year to 8.08p. A total dividend of 4.5p for the year was paid.

At the end of October 2007 Safestore had net borrowings of £225.1 million, almost unchanged compared to the levels of debt at the same time in 2006. As at 31st October the company’s property portfolio was valued at £583.7 million, an increase of 24% or £113.1 million since the 2006 year end. Net assets rose by 81.6% over the period to £247.9 million, contributing to the company’s gearing falling from 166.7% to 90.8%. Net assets adjusted for deferred tax stood at £372 million.

RECENT TRADING
During the year the company opened six new stores in Slough, Guildford, Hayes, Newcastle, Eastbourne and Paris and two satellite stores in Burnley and Stevenage. The company has said that each of the new stores has had a promising start and are trading in line with expectations. At the end of the period the company had 18 further store openings in the pipeline. Since the year end one store, in Glasgow, has now opened with a further 10 expected to open in 2008 and the remainder in 2009/10.

RISKS
Given that the demand for Safestore’s offering is largely exposed to sales in the UK housing market a slowdown in the sector, which is widely expected, could affect the operating side of the business. A wider economic slowdown could also have the effect of influencing customers to sell goods or even keep them at home to save money as opposed to putting them in storage.

As well as threats to consumer demand for storage space the company is also exposed to a fall in property prices. Under the new IFRS accounting rules any change in the value of the company’s properties is included in the profit and loss account. Any falls in value will have an effect on both unadjusted profits as well as net asset value. However, the company’s properties are located on land which can have many other alternative uses, including residential developments, and as such the company may not be quite so exposed to a fall in demand in the wider market as you might expect.

VALUATION
As at 31st October 2007 Safestore had an adjusted net asset value per share of 198.8p. The current price of 162.5p is an 18% discount to this figure. Despite the expected continuing slowdown in the property sector we think that this significantly undervalues the company. Given the location of many of the company’s stores we believe that they could be worth much more than their current given value due to the alternative uses that are available for them. This was evidenced in March 2007 when competitor Lok’n Store sold its Kingston property, which was valued at £2.75 million, to a residential developer for £10 million. Backed up by a strong market for self storage, despite the risks associated with economic and property market slowdowns, we rate the shares as a BUY.

Key Data

EPIC: SAFE
Market: FULL LIST
Spread: 158p - 160p (1.2%)

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