CapitaLand Retail China Trust is a S$1.53B small-cap real estate investment trust (REIT) based in Singapore, Singapore. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how AU8U’s business operates and also how we should analyse its stock. I’ll take you through some of the key metrics you should use in order to properly assess AU8U.See our latest analysis for CapitaLand Retail China Trust
Funds from Operations (FFO) is a higher quality measure of AU8U’s earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For AU8U, its FFO of S$116.26M makes up 81.40% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether AU8U has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take AU8U to pay off its debt using its income from its main business activities, and gives us an insight into AU8U’s ability to service its borrowings. With a ratio of 15.50%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take AU8U 6.45 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.
Next, interest coverage ratio shows how many times AU8U’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 4.95x, it’s safe to say AU8U is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at AU8U’s valuation relative to other REITs in Singapore by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. AU8U’s price-to-FFO is 13.18x, compared to the long-term industry average of 16.5x, meaning that it is slightly undervalued.
Next Steps:CapitaLand Retail China Trust can bring diversification into your portfolio due to its unique REIT characteristics. Before you make a decision on the stock today, keep in mind I’ve only covered one metric in this article, the FFO, which is by no means comprehensive. I’d strongly recommend continuing your research on the following areas I believe are key fundamentals for AU8U:
- Future Outlook: What are well-informed industry analysts predicting for AU8U’s future growth? Take a look at our free research report of analyst consensus for AU8U’s outlook.
- Valuation: What is AU8U 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 AU8U is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.