Expansion Into Prime Locations Will Extend Reach But High Leverage Could Hurt Profits

Key Takeaways

• Strategic prime location focus and digital investments could drive revenue growth and improve net margins by increasing demand and operational efficiency.
  
• Expansion via new developments and M&As in Europe may boost operational scale, profitability, and earnings per share as facilities mature.
  
• High leverage, capital spending, and competition could strain Shurgard's financial flexibility and margins, while growth strategies entail execution risks in new markets.

Catalysts

Engages in the acquisition, development, and operation of self-storage facilities for business and personal use.

• Shurgard Self Storage has a significant secured pipeline of new store developments and acquisitions, which indicates potential revenue growth as these become operational, impacting occupancy rates and rental income.
  
• The company's focus on prime locations in capital and major cities continues to be a competitive advantage, likely driving higher revenue per square meter due to higher demand and limited supply.
  
• Ongoing investment in digital platforms and operational efficiency, such as the e-rental process and app utilization, could lead to cost savings and improved net margins over time.
  
• The expansion strategy through both organic growth and M&A activities in select European markets aims to enhance operational scale and profitability, suggesting potential EPS growth as new facilities mature and contribute more significantly to revenue.
  
• Shurgard's improvement in same-store occupancy rates and rental rate management is expected to drive steady same-store revenue growth, enhancing NOI and potentially leading to strong earnings despite external economic fluctuations.

Shurgard Self Storage Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shurgard Self Storage's revenue will grow by 8.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 99.1% today to 55.4% in 3 years time.
• Analysts expect earnings to reach €287.6 million (and earnings per share of €2.15) by about March 2028, down from €402.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €376.2 million in earnings, and the most bearish expecting €199 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.5x on those 2028 earnings, up from 8.1x today. This future PE is greater than the current PE for the BE Specialized REITs industry at 8.2x.
• Analysts expect the number of shares outstanding to grow by 1.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.43%, as per the Simply Wall St company report.

Shurgard Self Storage Future Earnings Per Share Growth

Risks

• High leverage levels resulting from net debt to EBITDA ratios above long-term targets could reduce financial flexibility and increase interest expenses, potentially impacting net margins and earnings.
  
• Intensive capital spending to expand physical footprint, including acquiring new stores and more operational development, could strain free cash flow and affect future profitability.
  
• Significant reliance on continuous increase in occupancy rates and existing customer rate increases for revenue growth—any failure in maintaining high occupancy or successful implementation could impair revenue and earnings growth.
  
• Increased competition in the self-storage market could lead to pricing pressure, affecting revenue growth and net margins negatively.
  
• Expansive growth strategy, especially in lesser-established markets like Germany, includes execution risks, which could impact projected revenue growth and margins if achievement of scale takes longer than expected.

Valuation

• The analysts have a consensus price target of €42.068 for Shurgard Self Storage based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €54.0, and the most bearish reporting a price target of just €36.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €519.2 million, earnings will come to €287.6 million, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 5.4%.
• Given the current share price of €33.15, the analyst price target of €42.07 is 21.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.