Why Lok’n Store Group plc could be a better buy than its banker Royal Bank of Scotland Group plc

Lok’n Store Group plc (LON:LOK) is set to smash Royal Bank of Scotland Group plc (LON:RBS) on growth and dividends.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »