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Frasers Logistics & Industrial Trust (SGX:BUOU) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. Today we will examine BUOU’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
View our latest analysis for Frasers Logistics & Industrial Trust
Is Frasers Logistics & Industrial Trust generating enough cash?
Frasers Logistics & Industrial Trust generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
There are two methods I will use to evaluate the quality of Frasers Logistics & Industrial Trust’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Frasers Logistics & Industrial Trust’s yield of 2.81% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Frasers Logistics & Industrial Trust but are not being adequately rewarded for doing so.
What’s the cash flow outlook for Frasers Logistics & Industrial Trust?
Can BUOU improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 40%, ramping up from its current levels of AU$124m to AU$173m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, BUOU’s operating cash flow growth is expected to decline from a rate of 21% in the upcoming year, to 6.4% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.