Folkestone Limited (ASX:FLK), a AUDA$181.91M small-cap, operates in the real estate industry which remains the single largest sector globally, and has continued to play a key role in investor portfolios. Real estate analysts are forecasting for the entire industry, a fairly unexciting growth rate of 1.27% in the upcoming year , and an optimistic near-term growth of 14.22% over the next couple of years. However, this rate came in below the growth rate of the Australian stock market as a whole. Today, I will analyse the industry outlook, and also determine whether FLK is a laggard or leader relative to its real estate sector peers. See our latest analysis for FLK
What’s the catalyst for FLK’s sector growth?
Not every category of real estate is likely to be impacted the same by macroeconomic factors such as interest rate hikes, and not all locations are primed to grow. So, investors must remain cautiously optimistic and analyse the fundamentals of the underlying industry. In the past year, the industry delivered growth of 6.43%, beating the Australian market growth of 5.37%. FLK leads the pack with its impressive earnings growth of over 100% last year. However, analysts are not expecting this industry-beating trend to continue, with future growth expected to be -13.08% compared to the wider real estate sector growth hovering of 1.27%, next year.
Is FLK and the sector relatively cheap?
The real estate sector’s PE is currently hovering around 12x, in-line with the Australian stock market PE of 17x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a lower 9.80% compared to the market’s 11.92%, potentially indicative of past headwinds. On the stock-level, FLK is trading at a PE ratio of 14x, which is relatively in-line with the average real estate stock. In terms of returns, FLK generated 8.81% in the past year, in-line with its industry average.
What this means for you:
Are you a shareholder? FLK is a real estate industry laggard in terms of its future growth outlook, and is trading relatively in-line with its peers. If your initial investment thesis is around the growth prospects of FLK, there are other real estate companies that are expected to deliver higher growth in the future, and perhaps trading at a discount to the industry average. Consider how FLK fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If FLK has been on your watchlist for a while, now may not be the best time to enter into the stock. Its growth is expected to be lower than its real estate peers in the near term, and it is also trading at a PE in-line with these companies. If growth and mispricing are important aspects for your investment thesis, there may be better investments in the real estate sector.