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Stor-Age will be the stock in focus: (Price at time of writing: R10.09 as 5 October 2016)
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Background and overview of Stor-Age (SSS)
One of the newer listings on the JSE is niche property REIT, Stor-Age. They raised R1billion through their share placements and listing with the bulk of capital raised to be used to lower their levels of gearing and to fund the expansion of the business.
Stor-Age offers self storage space to clients in most of South Africa's big metropolitan areas. They own 24 properties that includes locations in Pretoria, Bloefontein, Cape Town, Johannesburg, Port Elizabeth and Mount Edgecomb (KZN) with their storage options ranging from renting a 3 square meters unit to units over 30 square meters. They currently have just over 181 000 square of gross lettable area (GLA), with just over 155 000 square meters being occupied (giving them an occupancy ratio of 86%). According to SSS 77% of their occupied GLA is made up by residential customers the other 23% by commercial customers.
In addition to this they have 9 properties that has a GLA of 55 000 square meters that they manage (not part of their listed portfolio) for which they receive a management fee. Their client base is a very diverse one with over 14 300 different tenants using their units, and according to the company the average length of stay of their tenants is 21 months and average rent paid per square meter is currently sitting at R76.30
Stor-Age offers self storage space to clients in most of South Africa's big metropolitan areas. They own 24 properties that includes locations in Pretoria, Bloefontein, Cape Town, Johannesburg, Port Elizabeth and Mount Edgecomb (KZN) with their storage options ranging from renting a 3 square meters unit to units over 30 square meters. They currently have just over 181 000 square of gross lettable area (GLA), with just over 155 000 square meters being occupied (giving them an occupancy ratio of 86%). According to SSS 77% of their occupied GLA is made up by residential customers the other 23% by commercial customers.
In addition to this they have 9 properties that has a GLA of 55 000 square meters that they manage (not part of their listed portfolio) for which they receive a management fee. Their client base is a very diverse one with over 14 300 different tenants using their units, and according to the company the average length of stay of their tenants is 21 months and average rent paid per square meter is currently sitting at R76.30
Scroll over or click on the funnel chart to get more details of SSS's latest financial results.
Financial review:
SSS is sitting on a net profit margin of close to 100%. But readers should note that SSS had no taxes paid during the period's financials. In addition to this a large chunk of their profits were made up by fair value adjustments in the property assets. Fair value adjustments are made on the value of the properties they own, if the value of the properties increased then it comes through the income statement as a positive fair value adjustment and visa versa if the value of their properties declined. This figure can artificially inflate reported profit figures and investors are advised to rather look at profits excluding fair value adjustments. If the fair value adjustments are stripped out of the profit for the period their net profit margin amounts to 68.07% (more in line with other REITS such as Hyprop earing around 50% and GrowthPoint about 77%)
Earnings per share (this includes the fair value adjustments) for the full year came in at 43.7c, placing SSS on a PE ratio of 23.1 (which is very steep when compared to their peers). Looking at their PE ratio derived from their headline earnings per share (fair value adjustments excluded and we feel a more accurate measure of thei business' profitability) their PE ratio is sitting at 33.7. Either the market is expecting stunning growth in earnings for SSS or they are completely mispricing the share? Well SSS has 72 000 square meters in the pipeline (awaiting town planning and other approvals).
Lets assume all approvals are given and 72 000 square meters comes on line (at 86% occupancy and rent per month per square meter equating to R76.30 and net profit excluding fair value adjustments will be 68.07%), this will bring in an additional R38.6million in net profits into SSS books. If this is the case their headline earnings per share will be more in the region of 58c a share (placing them on a much more respectable PE of 17.4)
Earnings per share (this includes the fair value adjustments) for the full year came in at 43.7c, placing SSS on a PE ratio of 23.1 (which is very steep when compared to their peers). Looking at their PE ratio derived from their headline earnings per share (fair value adjustments excluded and we feel a more accurate measure of thei business' profitability) their PE ratio is sitting at 33.7. Either the market is expecting stunning growth in earnings for SSS or they are completely mispricing the share? Well SSS has 72 000 square meters in the pipeline (awaiting town planning and other approvals).
Lets assume all approvals are given and 72 000 square meters comes on line (at 86% occupancy and rent per month per square meter equating to R76.30 and net profit excluding fair value adjustments will be 68.07%), this will bring in an additional R38.6million in net profits into SSS books. If this is the case their headline earnings per share will be more in the region of 58c a share (placing them on a much more respectable PE of 17.4)
Cash generated from operations amounted to R71.5million (or 51.3c per share) for the period. Total cash and equivalents on their books is sitting at a worryingly low R9.86million (or 7c a share). Accordign to their cash flow statement R1.357billion was used to acquire investment properties, with the bulk of that being funded by the proceeds from the issue of shares (and an incease in their bank borrowings).
While bank borrowings have increased SSS is not highly leveraged at all with their Debt:Equity ratio sitting at 0.15 (where a ratio of 1 implies for every R100 in funding shareholders supplied a R100 in debt is used, less than one signals that more funds are raised from shareholders than from debt and a ratio higher than one implies more funds are raised via debt, than from shareholders).
Below a pie chart showing their total Income earned per region as well as their operating profit per pregion:
While bank borrowings have increased SSS is not highly leveraged at all with their Debt:Equity ratio sitting at 0.15 (where a ratio of 1 implies for every R100 in funding shareholders supplied a R100 in debt is used, less than one signals that more funds are raised from shareholders than from debt and a ratio higher than one implies more funds are raised via debt, than from shareholders).
Below a pie chart showing their total Income earned per region as well as their operating profit per pregion:
From the pie charts it is clear that the bulk of SSS's total income and operating profit comes from the Western Cape and Gauteng, with these two provinces making up around 90% of both income earned and operating profits. In their documentation they state that their primary focus areas right now is Cape Town, Pretoria, Johannesburg and Durban. So one can assume that the majority of their income in future would still come from Gauteng and Western Cape, and perhaps in the longer term a greater portion coming from KwaZulu-Natal, since Durban is one of their primary focus areas right now.
A few financial ratios for SSS (calculated using our Financial Ratios Calculator):
- Debt to Equity Ratio: 0.15 (more than 2 shows high levels of financial leverage).
- Current Ratio: 0.24 (A measure of liquidity. Less than one signals possible trouble in paying off current liabilities).
- Quick Ratio: 0.23 (Another liquidity measure. Shows how much in liquid assets is available to cover current liabilities or short term debt).
- Return on Assets (ROA): 2.43%
- Return on Equity (ROE): 2.81%
- Net Profit Margin: 68.07%
- Dividend Yield: 3.07%
Valuation:
Based on SSS's current financial results we value them at between R9.55 and R10.00. We therefore feel that SSS is fully priced and we do not expect the share to move upwards in the near future. Investors should note that the share is not the most liquid and irratic swings in the share price can take place due to the low volumes being traded in the share. We wonder why Coronation (via the funds they managed) have upped their stake in SSS recently to just over 15%?
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.