Why You Shouldn't Look At Immobiliare Grande Distribuzione SIIQ S.p.A.'s (BIT:IGD) Bottom Line
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Immobiliare Grande Distribuzione SIIQ S.p.A. is a €677m small-cap, real estate investment trust (REIT) based in Bologna, Italy. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how IGD’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 IGD.
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Funds from Operations (FFO) is a higher quality measure of IGD'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 IGD, its FFO of €81m makes up 60% of its gross profit, which means the majority of its earnings are high-quality and recurring.
IGD'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 IGD 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 7.2%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take IGD 14 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 IGD'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 2.48x, IGD is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
I also use FFO to look at IGD's valuation relative to other REITs in Italy 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. In IGD’s case its P/FFO is 8.36x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.
Next Steps:
In this article, I've taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. Immobiliare Grande Distribuzione SIIQ can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:
Future Outlook: What are well-informed industry analysts predicting for IGD’s future growth? Take a look at our free research report of analyst consensus for IGD’s outlook.
Valuation: What is IGD 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 IGD 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.
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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.
