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Frasers Commercial Trust is a S$1.3b small-cap, real estate investment trust (REIT) based in Singapore, Singapore. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. I’ll take you through some of the key metrics you should use in order to properly assess ND8U.
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 ND8U’s daily operations. For ND8U, its FFO of S$84m makes up 89% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether ND8U 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 ND8U to pay off its debt using its income from its main business activities, and gives us an insight into ND8U’s ability to service its borrowings. With a ratio of 14%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take ND8U 7.31 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.
I also look at ND8U's interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it's better to use FFO divided by net interest. With an interest coverage ratio of 3.56x, it’s safe to say ND8U is generating an appropriate amount of cash from its borrowings.
In terms of valuing ND8U, 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. ND8U's price-to-FFO is 15.87x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.
As a REIT, Frasers Commercial Trust offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in ND8U, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for ND8U’s future growth? Take a look at our free research report of analyst consensus for ND8U’s outlook.
- Valuation: What is ND8U 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 ND8U 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.
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 firstname.lastname@example.org. 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.