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Frasers Hospitality Trust is a S$1.4b small-cap, real estate investment trust (REIT) based in Singapore, Singapore. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how ACV’s business operates and also how we should analyse its stock. In this commentary, I'll take you through some of the things I look at when assessing ACV.
See our latest analysis for Frasers Hospitality Trust
Funds from Operations (FFO) is a higher quality measure of ACV'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 ACV, its FFO of S$113m makes up 97% of its gross profit, which means the majority of its earnings are high-quality and recurring.
ACV'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 ACV 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 14%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take ACV 7 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 ACV'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 5.13x, it’s safe to say ACV is generating an appropriate amount of cash from its borrowings.
In terms of valuing ACV, 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. ACV's price-to-FFO is 12.01x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.
Next Steps:
As a REIT, Frasers Hospitality Trust offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in ACV, I highly recommend taking a look at other aspects of the stock to consider: