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Should You Invest In Stockland (ASX:SGP)?

Simply Wall St

Stockland is a AU$8.8b mid-cap, real estate investment trust (REIT) based in Sydney, Australia. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how SGP’s business operates and also how we should analyse its stock. Below, I’ll look at a few important metrics to keep in mind as part of your research on SGP.

Check out our latest analysis for Stockland

Funds from Operations (FFO) is a higher quality measure of SGP’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 SGP, its FFO of AU$728m makes up 85% of its gross profit, which means the majority of its earnings are high-quality and recurring.

ASX:SGP Historical Debt, March 12th 2019

In order to understand whether SGP 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 SGP to pay off its debt using its income from its main business activities, and gives us an insight into SGP’s ability to service its borrowings. With a ratio of 18%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take SGP 5.55 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 SGP’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 9.45x, it’s safe to say SGP is generating an appropriate amount of cash from its borrowings.

In terms of valuing SGP, 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. SGP’s price-to-FFO is 12.14x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.

Next Steps:

As a REIT, Stockland offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in SGP, 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 SGP’s future growth? Take a look at our free research report of analyst consensus for SGP’s outlook.
  2. Valuation: What is SGP 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 SGP 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.