Storage company Safestore (LSE: SAFE) has released a strong fourth quarter trading update today with revenue up by almost 14% at constant exchange rates and weak sterling providing an additional boost to the reported figure of 18.4%. Does this mean that Safestore is now a better buy than sector peer Big Yellow Group (LSE: BYG)? Well, that’s debatable.
Safestore enjoyed upbeat performance across its divisions. For example, in the UK like-for-like (LFL) sales increased by 9.2%, while in France they rose by 5%. This took LFL revenue growth for the full year to 8.1% at constant exchange rates, with Safestore’s balanced approach to revenue management proving to be highly successful.
A key reason for Safestore’s strong sales performance was a rise in occupancy. For the full year this increased by 3.5% LFL, with Safestore’s LFL average storage rate also up 3.9% at constant exchange rates. Alongside the acquisitions of Space Maker and the opening of five new stores towards the end of the financial year, this shows that Safestore is making good progress on both an organic and acqusition basis. Therefore, it expects earnings to be at the top of the consensus range.
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Looking ahead, Safestore has the potential to deliver further growth in the long run. It’s focused on the significant opportunity presented by its 1.6m sq ft of currently unlet space. And its balance sheet capacity and flexibility provide it with the scope to make further acquisitions in order to boost its organic growth potential.
A better bet?
Safestore is expected to record a rise in earnings of 13% in the current financial year. This compares favourably to sector peer Big Yellow, which is expected to post a rise in earnings of 10% in the both the current year and the next one. However, Big Yellow’s growth outlook is arguably more stable than that of Safestore. The former has increased earnings in each of the last five years, while Safestore’s reported earnings have been more volatile and less consistent.
This could indicate that Big Yellow has a lower risk profile than Safestore and may explain why it trades at a premium to its sector peer, with Big Yellow having a price-to-earnings (P/E) ratio of 19.6 versus 18.7 for Safestore. Given the relatively minor difference in their valuations and growth prospects, Big Yellow appears to have a superior risk/reward ratio to Safestore.
In addition, it yields 4.1% versus 3.1% for Safestore. While the latter’s dividends are covered 1.7 times versus 1.3 times for Big Yellow, the higher yield of the latter plus its strong earnings growth prospects means that it has greater income appeal over the medium term. Alongside a lower risk profile and despite a marginally higher valuation, this makes Big Yellow the better buy. However, Safestore is still set to deliver a high total return in the coming years.
