Investors’ Chronicle: Safestore, Flutter Entertainment, Gateley

Stay informed with free updates

Simply sign up to the Investments myFT Digest — delivered directly to your inbox.

BUY: Safestore (SAFE)

The self-storage landlord secures another year of growth by most metrics, writes Mitchell Labiak.

When you look at what it cannot control, Safestore had a troublesome year. But when you look at what it can, the self-storage landlord and operator had about as good a year as possible.

In its results for the year to October 31 2023, pre-tax profit slumped by over half because higher interest rates meant its properties gained less value than in 2022, something beyond its control. However, underlying earnings, which strips out valuation changes, rose 5.26 per cent thanks to a 5.5 per cent bump in rental income as the company “opened, acquired, or extended 13 stores across three countries, adding around 500,000 square feet of maximum lettable area to the portfolio”.

Wisely, the company has not funded this expansion by loading up on more debt, meaning its net asset value (NAV) per share rose 8 per cent. That is no small feat at a time when most other landlords are posting steep drops in NAV due to falling asset values and increasing debt.

The big bear point for Safestore is the occupancy rate, which fell from 82.1 per cent to 77 per cent. This trend has been evident for some time now, and its listed rival, Big Yellow, is in a similar position. Both companies say vacancy is a byproduct of rapid expansion, directing shareholder attention instead to in-house figures such as revenue per available square foot. In Safestore’s case, this has nudged up, but only by 0.4 per cent. Another bear point is the slow start to its 2024 financial year, with revenue for November and December down 0.6 per cent on a like-for-like basis

Still, when a company is displaying this kind of earnings, dividend and NAV resilience, and comes at a discount to that NAV, it’s time to upgrade our rating despite an admittedly challenging backdrop.

HOLD: Flutter Entertainment (FLTR)

A calculated expansion into the huge US gaming market pays off for Flutter, writes Julian Hofmann.

Flutter, the Ireland-based betting company, saw its share price rise by 11 per cent after a trading update showed that a surge in US revenue sent investors scrambling for the shares.

The unaudited revenue for its US sports and gaming book rose in the quarter by 26 per cent to £1.13bn at constant currency, compared with this time last year. However, a weak margin and some unfavourable sports results meant the company’s cash profit forecasts are likely to undershoot by £50mn.

According to Peel Hunt, it was adverse results in November’s NFL games that caused a 320 basis point swing in the achieved margin; on a reported basis the theoretical margin in the fourth quarter was 13.5 per cent in the US, or up by 220 basis points. Flutter reckons that adverse results cost it $343mn (£270mn) in revenue. Meanwhile, there was strong growth in the UK and Ireland segment, with a 19 per cent rise in constant currency to £647mn on the back of increased market share.

Flutter remains on course to commence its listing on the New York Stock Exchange on January 29 and reports its full-year results on March 26.

Broker Peel Hunt has cut its guidance for 2023 based on the £60mn in cash profits generated by the US business. That means 7 per cent lower earnings per share for 2023 of 415p, giving a price/earnings ratio of 31.4. That does not represent a great value deal, particularly when mis-steps such as unexpected teams winning are beyond the control of management. Great potential, but we need to see a more affordable price.

HOLD: Gateley (GTLY)

The professional services group is reluctant to commit to full-year guidance, writes Jemma Slingo.

The market did not react well to Gateley’s interim results. It is easy to see why. Adjusted operating profit at the professional services group fell by 15 per cent in the period to £8.6mn, the dividend has plateaued at 3.3p, and the outlook for the rest of the year is hazy at best. 

It is not all doom and gloom, though. Gateley achieved organic revenue growth of 5.1 per cent in the six months to October 31 2023, and pre-tax profits actually rose on the back of higher interest payments. However, activity levels across the group were subdued and staff utilisation fell from 86 per cent to 83 per cent. Divisions exposed to transactional legal work were hit particularly hard, and management warned that conditions had not improved as expected.

At the same time, personnel costs increased as a percentage of revenue from 61.7 per cent to 63.4 per cent, as Gateley targeted more senior hires. 

Management is reluctant to commit to full-year guidance, saying “the combination of ongoing macro uncertainty, varying activity levels across the group and the natural weighting towards the final months of the financial year make the group’s full-year out-turn more difficult than usual to forecast”. It did say, however, that trading should be “broadly in line with market consensus”. 

It is a difficult one to call. Counter-cyclical services are clearly protecting Gateley from the worst of the economic turbulence, and its forwards price/earnings ratio is 20 per cent below its five-year average at 9.7. The uncertainty is unsettling though.