In today’s company results, I will look into self-storage company Lok n Store Group and software telecom provider Artilium Group.
Lok n Store Group
Share price: £3.75 (up 3.4%); Market Cap.: £109m.
This self-storage company saw revenue increased by 3.7% to £16.65m, as LFL is up by 5.6%.
Profit after tax rose to £3.17m, up from £2.46m last year, an increase of 28.8%. Looking at it in detail, we see operating profit fell to £4.26m from £6.228m. That’s because last year it was helped by net settlement proceeds of £1.94m.
So, excluding for net settlement proceeds, operating profit remains unchanged.
Unsurprisingly, the rise in property valuation fell from £17.7m to £7.7m, reflecting a slower price appreciation.
Some would ask this question:
Is this a change in wind direction or a minor correction in property value?
The chart below shows this is the first time Lok n Store has reported a smaller increase in property gains.
See “Market Valuation” for the effects of lower property gains.
The majority of Lok n Store revenue income comes from self-storage and the rest is a mixture of document archive, retail sales (boxes and duct tape) and insurance. The breakdown is below:
Ignoring profits, the revaluation of property is a better business than renting out self-storage units. That’s because asset turnover decreased from 0.15 to 0.11, a falling ratio means revenue generated grew slower than the rise in property value.
For more proof, UK property prices rose by 5% last year, compared to unit price rise of 0.8% down from 2.2%. But the occupancy rate rose by 6.5% to normalised occupancy rate to 69.8% (Stripping out stores which have opened or moved in the last 3 years) up from 64.5% in 2013.
Net cash profit rose to £5m from £2.8m, thanks to lower receivables cash outflow of £2m and no one-off item. If we look at 2014 and 2015, it made £5.2m and £5.6m. It puts the improvement into perspective.
Net debt saw an improvement of £17.4m from £23.5m helped by proceeds from treasury shares of £9.9m. Also, this helps cash balance to £11.4m as it brings down the loan to value to 14% from 20%.
They made a profit from the sales of treasury shares since they bought it for £1.52 per share and sold it at £4.05 per share. Not a bad investment!
Lok n Store valuation isn’t necessarily based on how much profits get made or sales generated, but it relies on the pillars of the two “Rs” revaluation and reclassification of land and property value.
If you look at their annual report (see note 10/11 on property, plant and equipment) there are four different categories on land and property value, these are: –
1). Additions; – land and property directly acquired;
2). Reclassification; – that is the conversion of development property assets to land and property;
3). Revaluation; – the revaluation of existing land and property portfolio based on the change in property prices;
4). Disposal of assets.
Below is the breakdown in the change of land and property value for 2015, 2016 and 2017:
For the sake of context, Lok n Store land and property value rose from £51.4m in 2014 to £87.5m in 2017, a £36.1m change in value.
The cash outflow for acquiring these assets totals £13.7m and two-thirds came from revaluations of existing property.
Important: – If property value falls in the UK, then the domino effect of Lok n Store’s market valuation is huge because revaluation is why the shares are rising.
Last year, their development of property assets dropped to £500k from £14m in 2014. It made investors wonder if the company was taking a conservative approach. Now, it has added £4.67m of developmental property to their portfolio.
The usual PER of 30 times is a misleading indicator for self-storage companies.
A better indicator of under/overvaluation is to use the price to tangible assets ratio.
This graph above paints a picture of more upside to come, but there is a word of warning!
Caution: Lok n Store didn’t revalue their property assets back in 2005 and 2006 which inflated their price to tangible ratio!
For example, in 2006 their tangible assets were valued at £25m and they spent just £9m in capex. The market cap. was £39m. So, 39/25 = 1.56 times.
In 2007, they revalued their tangible assets from £25m to £76m. Overnight, the ratio fell to 0.8 causing undervaluation in the shares and caused the share price to rise by 50%.
Therefore, I conclude that last year the price to tangible ratio was at an all-time high of 1 time.
A secondary measure that could be useful is the NAV/Net Cash from Operation ratio. It’s a measure of how the rise in Lok n Store NAV correlates to their operational performance.
Indicators that will move Lok n Store share price
The obvious mover of Lok n Store share is identifying the trend or the increase/decrease of property revaluation, this is obviously linked to the UK property prices. Given that PE ratio is in the 30s, then a decline in value would be intrinsically bad for the market value of the self-storage business.
My second factor is the occupancy rate and price increase of renting out storage. Although it plays second fiddle, the demand for more self-storage is a sign that Britain is spending too much money on things. A reflection of a consumer society.
Lastly, this factor affects both the first and second, that is a recession.
Lok n Store depends heavily on property revaluation to keep their share price high. Earnings and revenue are secondary measurements.
Right now, the market capitalisation has risen faster than the value of their property portfolio, causing valuations to be on the high side.
A lower property revaluation number does bring some concerns. Therefore, I feel the shares have raced ahead.
At best a hold, and don’t expect to see much in the way of share price appreciation.
Share price: £0.1025 (up 6%); MKT. CAP.: £37m.
The company is a software company within the telecom industry. Their technology is their ARTA® platform. It does real-time Authentication, Authorization and Accounting (AAA) software of voice, text and 3G/4G data services, VoIP, mobile payments, etc. for telecom and virtual operators.
Apart from seeing revenue growth of 8.6% to €10.5 million (2016: €9.6 million), Artilium has given investors some food for thought.
First, it secured the renewal of their Telenet licence in February 2017 for €5.3m for services over the next five years. (€1m per annum)
Secondly, they struck a strategic partnership with Pareteum Corporation (NYSE: TEUM) to jointly pursue new and developed markets.
Pareteum is a small internet service provider with a market cap. of $18m.
Details of the deal
Artilium issued 27,695,177 new ordinary shares at a notional price of 11 pence per ordinary share to Pareteum in exchange for Pareteum issuing 3,200,332 new common shares at a notional price of US$1.26 per common share to Artilium.
That means Pareteum is holding £3.04m of Artilium and Artilium is holding $4.032m of Pareteum.
By the way, both companies share price is below the exchange price.
Despite the rise in sales, trade receivables continued to fall to 2.4m Euros from 3.9m Euros. However, the directors said the average credit days have risen to 67 days from 53 days. This doesn’t make sense if receivables are falling and sales are rising.
Then you discover the 1m Euros of receivables were held as “Non-current assets.”
That spilt over to Artilium improvement in Cash Profit to 3.8m Euros from a loss of 1.26m Euros. One attribute to higher cash profit was 1.6m Euros cash inflow from receivables, as the company made no mention of the 1m Euros in their cash flow statement.
One Positive News:
There is no mention of it being a subscription-based business, but let’s assume that is the case. So, their deferred income has seen a rise to 4.9m Euros from 2.5m Euros last year, although 2015’s deferred income was 4.2m Euros.
That means more business for them, but we should be careful about the costs of fulfilling this service as it appears to not make any profits.
The company’s financial performance seems volatile regarding revenue generation and it has been this way for ten years and today’s result was no exception.
Another problem is their level of goodwill.
The company 17m Euro in Goodwill is broken down by the following:
1). Artilium (€10.6 million);
2). Comsys (including Livecom International) (€3.4 million);
3). United Telecom (€3.1 million).
There is a high risk of goodwill impairments if business starts making heavy losses.
Finally, the constant need to raise cash has been consistent (unlike profits). Since 2006, it raised £27.8m from equity issuance.
That explains the struggle of cash flow from Artilium business. Cash appears to increase to 2.8m Euros from 422k Euros, most of that was down to the positive movement of working capital of 3.3m Euros.
I feel the business lack of competitive advantage in a very competitive sector makes it a unviable proposition for investors. That’s because of several things investors should be cautious about:
1). High Goodwill value; – it could destroy the venerable £37m market valuation.
2). The mystery behind reallocating 1m Euros of receivables to Non-current assets.
The shares have risks attached, but people interested need to do more research.
Thanks for reading this short update, I could only two stocks today.
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The above analysis is based on my opinion and nobody else. It does not constitute professional investment advice. Data is correct on at the time of availability. I don’t hold the company’s shares unless stated.