Strategic Expansion Boosts Revenue, But Financing And Dilution Could Pressure Earnings Growth

Key Takeaways

• Strategic acquisitions and expansion projects are driving strong revenue growth and expanding operating income capacity notably.
  
• Digitalization and refinancing bolster operational efficiency and financial stability, sustaining robust earnings growth without diluting shareholder value.
  
• Acquisitions and financing strategies could strain liquidity and impact margins, with potential risks to shareholder value and earnings.

Catalysts

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

• Shurgard's strategic expansion, including the acquisition in the U.K. and three in Germany, has significantly contributed to revenue growth, with a year-to-date growth of 10.8%. This expansion is expected to continue driving revenue upward.
  
• The company's investment in pipeline projects, with over 400,000 square meters of additional capacity planned by 2026, is set to substantially increase the net operating income (NOI) by approximately €100 million annually once fully matured, enhancing overall revenue growth.
  
• The integration of Lok'nStore is anticipated to yield 8% NOI within 5-6 years due to synergy savings and improved occupancy rates, supporting a robust long-term earnings growth trajectory.
  
• Operational efficiencies from digitalization initiatives have improved the same-store NOI margin to 66.7%, reinforcing net margins and enabling continued bottom-line growth.
  
• Shurgard's successful refinancing, coupled with its strong investment-grade rating, should allow continued portfolio and pipeline expansion without immediate need for an equity raise, thereby minimizing EPS dilution and supporting earnings stability.

Shurgard Self Storage Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shurgard Self Storage's revenue will grow by 11.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 108.8% today to 50.9% in 3 years time.
• Analysts expect earnings to reach €262.4 million (and earnings per share of €3.1) by about December 2027, down from €405.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €433 million in earnings, and the most bearish expecting €186.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.1x on those 2027 earnings, up from 8.8x today. This future PE is lower than the current PE for the BE Specialized REITs industry at 26.1x.
• Analysts expect the number of shares outstanding to decline by 4.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.94%, as per the Simply Wall St company report.

Shurgard Self Storage Future Earnings Per Share Growth

Risks

• The acquisition of Lok'nStore, while expected to be earnings neutral in 2024, adds increased financial leverage and may not be accretive until 2025, creating potential risks for net margins and earnings growth.
  
• The company has issued a new 10-year bond with a fixed coupon of 3.625%, which increases interest expenses and could impact net margins.
  
• The equity raise in November 2023 has caused a dilution, leading to a stable or slightly lower earnings per share, which could affect shareholder value and earnings in the near term.
  
• Despite a growth-oriented balance sheet and low leverage, external financing requirements for significant pipeline investments (€1.2 billion) could strain liquidity and impact net margins.
  
• Expansion plans, including a secured pipeline until 2026, require substantial investments and depend on achieving projected yields at maturity; any deviation could adversely affect net operating income and earnings.

Valuation

• The analysts have a consensus price target of €46.25 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 €56.0, and the most bearish reporting a price target of just €35.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €515.9 million, earnings will come to €262.4 million, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 4.9%.
  
• Given the current share price of €36.1, the analyst's price target of €46.25 is 21.9% 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.