Frasers Centrepoint Trust's (SGX:J69U) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Frasers Centrepoint Trust (SGX:J69U) has had a rough three months with its share price down 10%. 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 Frasers Centrepoint Trust'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Frasers Centrepoint Trust

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Frasers Centrepoint Trust is:

6.0% = S$152m ÷ S$2.5b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made SGD0.06 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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Frasers Centrepoint Trust's Earnings Growth And 6.0% ROE

When you first look at it, Frasers Centrepoint Trust's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 5.4%, so we won't completely dismiss the company. Having said that, Frasers Centrepoint Trust has shown a modest net income growth of 6.8% over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Frasers Centrepoint Trust's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 7.6% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is J69U fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Frasers Centrepoint Trust Using Its Retained Earnings Effectively?

Frasers Centrepoint Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 88%, meaning the company retains only 12% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. Despite this, the company's earnings grew moderately as we saw above.

Besides, Frasers Centrepoint Trust has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 105% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 5.4%.

Conclusion

On the whole, we do feel that Frasers Centrepoint Trust has some positive attributes. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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