If you are currently a shareholder in Kiwi Property Group Limited (NZSE:KPG), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I’ve analysed below, the health and outlook of Kiwi Property Group’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
What is free cash flow?
Kiwi Property Group’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Kiwi Property Group to continue to grow, or at least, maintain its current operations.
I will be analysing Kiwi Property Group’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Kiwi Property Group’s yield of 3.88% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Kiwi Property Group but are not being adequately rewarded for doing so.
Is Kiwi Property Group’s yield sustainable?Does Kiwi Property Group’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. In the next couple of years, a growth of low single-digit 1.6% isn’t exciting, but it may be adequate, so long as capital expenditure doesn’t ramp up by even more. Below is a table of Kiwi Property Group’s operating cash flow in the past year, as well as the anticipated level going forward.
|Current||+1 year||+2 year|
|Operating Cash Flow (OCF)||NZ$108.2m||NZ$102.5m||NZ$110.0m|
|OCF Growth Year-On-Year||-5.3%||7.3%|
|OCF Growth From Current Year||1.6%|
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Kiwi Property Group as opposed to the diversified market portfolio, and also being compensated for less. Furthermore, its muted operating cash flow growth doesn’t seem appealing. Now you know to keep cash flows in mind, I suggest you continue to research Kiwi Property Group to get a more holistic view of the company by looking at:
- Valuation: What is KPG worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether KPG is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Kiwi Property Group’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.