You May Have Been Looking At CapitaLand Mall Trust (SGX:C38U) All Wrong

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CapitaLand Mall Trust is a S$10b mid-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 C38U’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 C38U.

Check out our latest analysis for CapitaLand Mall Trust

REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of C38U’s daily operations. For C38U, its FFO of S$456m makes up 98% of its gross profit, which means the majority of its earnings are high-quality and recurring.

SGX:C38U Historical Debt, July 8th 2019
SGX:C38U Historical Debt, July 8th 2019

C38U’s financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky C38U is, broadly speaking, to have debt on its books. The metric I’ll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 12%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take C38U 8 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.

Next, interest coverage ratio shows how many times C38U’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 4.64x, it’s safe to say C38U is generating an appropriate amount of cash from its borrowings.

In terms of valuing C38U, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. C38U’s price-to-FFO is 22.17x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.

Next Steps:

As a REIT, CapitaLand Mall Trust offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in C38U, I highly recommend taking a look at other aspects of the stock to consider:

  1. Future Outlook: What are well-informed industry analysts predicting for C38U’s future growth? Take a look at our free research report of analyst consensus for C38U’s outlook.
  2. Valuation: What is C38U 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 C38U is currently mispriced by the market.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.