Are Keppel DC REIT's (SGX:AJBU) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

It is hard to get excited after looking at Keppel DC REIT's (SGX:AJBU) recent performance, when its stock has declined 5.1% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Keppel DC REIT's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Keppel DC REIT

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Keppel DC REIT is:

6.9% = S$135m ÷ S$1.9b (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made SGD0.07 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Keppel DC REIT's Earnings Growth And 6.9% ROE

On the face of it, Keppel DC REIT's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 5.4% which we definitely can't overlook. This certainly adds some context to Keppel DC REIT's moderate 17% net income growth seen over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. E.g the company has a low payout ratio or could belong to a high growth industry.

As a next step, we compared Keppel DC REIT's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.6%.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for AJBU? You can find out in our latest intrinsic value infographic research report.

Is Keppel DC REIT Making Efficient Use Of Its Profits?

Keppel DC REIT has a high three-year median payout ratio of 74%. This means that it has only 26% of its income left to reinvest into its business. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. In spite of this, the company was able to grow its earnings by a fair bit, as we saw above.

Moreover, Keppel DC REIT is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 102% over the next three years. Regardless, the future ROE for Keppel DC REIT is speculated to rise to 10% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Summary

Overall, we feel that Keppel DC REIT certainly does have some positive factors to consider. Especially the substantial growth in earnings backed by a decent ROE. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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