Malaysian REITs (Part 2 - Updated)

We have seen how I filtered through 14 mREITs in Part 1. If you need a recall the link is here. There are like 40 financial ratios that I have seen but only a handful are being used and some on a need basis. I will not go through the formula abo you sure blur =p 


Debt Ratios
These are the most important ratios in my opinion. Do you agree if I say that debt ratios in short are equivalent to the company's & shareholders' financial risk since the greater amount of debts, the higher the risk of getting into bankruptcy. This is the sole reason why I use debt ratios for screening. Even if the company is generating enough cash to service its debt, growth & expansion will be hampered in a way as well.

• Gearing Ratio: the amount of leverage being used by a company. More leverage simply means more borrowings. In general a debt ratio of more than 0.5 is considered high, anything above 1.0 is very high. In Part 1 I used borrowings only, this time I use total liabilities to be more accurate.
• Debt-Equity Ratio: shows a different viewpoint of leverage being used by a company. Shows you how much money the creditors (money lender) have vs the company's equity holders (like you and me). In general D/E Ratio of more than 0.5 is considered high, anything above 1.0 is very high.
• Interest Coverage Ratio: shows how easily a company can pay interest expenses on outstanding debts. Creditors have high comfort level if the company is able to service debt interest payments. Start to question or doubt a company that has debts with interest coverage ratio of 2.0 or lower.

Armed with knowledge, let's relook at the debt ratios of the REITs, this time it has been expanded to include the other two more ratios.

Starhill, Boustead, UOA and PNB have very little debts with strong revenue to service them. You then have Sunway, Tower and Atrium in the sweet spot while the rest showing signs of increasing struggle in servicing debts through profits over the last 3 years. I would certainly avoid Hektar and KPJ, both are certainly aggressive in their expansion but one must know how to control the pace of it. 


Liquidity Ratios
These ratios attempt to measure the company's ability to pay off its short-term obligations such as debt, operating expenses and etc. Better liquidity will mean that a company is able to service its debts that are coming due in the near future and at the same time able to fund its ongoing operations with ease. In general we can use three ratios and each differs by type of assets used in the calculation.

• Current Ratio: as simple as getting the proportion of current assets available over current liabilities. Note the word "current" which means short-term (one year). This ratio is the used most extensively by analysts but it is by no means able to provide a clear picture to investors. Simply because not all assets are as liquid as compared to cash.
• Quick Ratio: a.k.a acid-test ratio further refines the current ratio by using most liquid current assets over current liabilities. Only differs by excluding inventory or any other assets that are deemed difficult to turn into cash.
• Cash Ratio: only taking into account current assets like cash, cash equivalent or invested funds over current liabilities. It is the most stringent and conservative of all three liquidity ratios. I would personally favour quick ratio as a balanced ratio.

Now let's check out the liquidity ratios of the REITs, previously I just added a column to show you the amount of current assets that has one year liquidity. This time we compare the ratios, this will be interesting.

In REITs, liquidity are mainly used for asset maintenance & other short term obligations while debts are used for asset acquisition. UOA is a special case, they do sales of properties as well and that is considered as inventory thus a big difference between current ratio to quick ratio, nevertheless I took current ratio because property development is part of their core business. Boustead is another unique one, they have a big portion of receivables because it is a performance-based profit sharing from the estates, dependent on the planted commodity prices. Therefore their quick ratio vs cash ratio varies a lot. It is fair to take quick ratio. If the company generates far enough revenue with respect to its interest payment (look at int cvg ratio in debt section), to me liquidity is not a problem for them. See Hektar, high leverage and low liqudity, scary isn't it? 


Profitability Indicator Ratios
Give investors a good picture of how well the company is utilizing its resources in generating profit and increasing shareholder value. A company that has long-term and sustainable profitability will ensure its survivability & determine how much returns the shareholders have. In short it tells you how much hard work is your money working for you :)

• Return On Assets: indicates how profitable a company is relative to its total assets. The higher the return, the more efficient the management is in utilizing its asset base.
• Return On Equity: indicates how much the shareholders earned for their investment in the company. The higher the return, the more efficient the management is in utilizing its equity base and results in better returns for investors.
• Return On Capital Employed: indicates a company's ability to generate returns from its available capital base. This is more comprehensive as it gauges management's ability to generate earnings based on company's total pool of capital.

The second ratio, ROE is widely used by analyst but it does have a profound weakness. A company with more debts would translate into smaller equity base and thus pushing up the ROE ratio higher. Very misleading as the profitability comes with a price which is a lot more debts! So it is better to use ROCE (the last ratio) vs ROE. Why I never use ROCE in my previous stock reviews is simply because the companies I chose doesn't even have debts :) But REIT is a different scenario. If you see that ROCE differs a lot from ROE it simply means the profits come at the cost of more debts. In the end, I find that only Starhill, Boustead and PNB have good profitability ratios. Tower and UOA seems OK too. 


Investment Valuation Ratios
The most anticipated part by most investors, they are used to estimate the attractiveness of an investment and to get an idea of its valuation. For REITs the terms and jargons are different than that of normal equities. Below are the valuation ratios that can help us determine where we park our money.

• Price/Adjusted Funds From Operations: FFO is net income which excludes depreciation unlike normal stocks. "Adjusted" means it takes into account capital expenditures required to maintain the existing portfolio of properties. Much like normal PE ratio for stocks, everyone should avoid buying too high multiple for Price/AFFO.
• Dividend Yield: REITs are suitable as income generator and thus as an income investor, this yield number matters a lot as a valuation measurement.
• Dividend Payout Ratio: indicator of how well earnings support the dividend payment. We should expect at least 90% payout ratio.
• Net Asset Value/Share: an expression that represents a company's value per share. Supply and demand of the market can push stock price above or below the NAV per share of a company.
• Premium/Discount Rate: the rate at which the company's value with respect to NAV per share price. Plus denotes overvalued (premium) while minus means undervalued (discount).

 

Tower and PNB are trading at a big discount currently with Tower having lower Price/AFFO ratio. UOA is interesting at low ratio. because rental income is not their only source, they do property development and sales thus can be excluded in comparison to the rest. There is limited data on the just listed Sunway and CapitaMalls so there was no conclusion to be made. Boustead is there again with low ratio compared to the industry average.

Conclusion

1. The big players Sunway & CapitaMalls has just been listed and have little convincing data apart from "textbook" prospectus. Both have some leverage on debt and it would be interesting to see how they perform in the coming years.
2. Starhill is in the midst of being repositioned as a hospitality REIT so what I am doing now is a waste of time LOL, we need to observe their new strategy in coming years. We will see, for now they are doing what they do pretty well. 
3. There are REITs which are in the neutral ground a.k.a in unforeseeable future. It includes AmFirst, Axis, Quill Capita & AmanahRaya. They have higher leverage but with decent earnings to service them for years to come. Room for future expansion will be tight for them unless they dispose some of their assets.
4. Tower, Atrium and UOA are more favorable but they are very small in size. Can see income here but growth is slow.
5. KPJ is overvalued and overhyped. I would also avoid Hektar. PNB is boring, really boring. The big discount is probably because investors are not even interested at all.
6. Boustead and UOA is the only choice I will make. Thus I will have a short writeup on it soon. I really do like Starhill but because of the repositioning it is difficult to see what will happen. I will continue to take note of Sunway, CapitaMalls and Starhill and perhaps might invest in them in the future. The rest they say is history.