Would Peter Lynch Buy CapitaMall Trust?

It is often said that you can’t fit a square peg in a round hole. The square peg in this case is Real Estate Investment Trust, CapitaMall Trust (SGX: C38U). The round hole is a hypothetical slot in Peter Lynch’s growth portfolio.

So, could CapitaMall Trust be the exception to the rule? Could Lynch actually warm to a Real Estate Investment Trust (REIT)?

Peter Lynch is looking for shares that are reasonably valued in relation to their growth rate. He likes to use the PEG ratio, which relates the Price-to-Earnings ratio to the profit growth rate of the stock. A PEG ratio of around one would be a sign that the stock is not overvalued.

But earnings, as far as REITs are concerned, are almost irrelevant. REITS can make far more money than their bottom-line would suggest. What counts is cash. Consequently, Funds from Operation, or FFO, could be more meaningful. In the case of CapitaMall Trust, it is valued at 19 times historical FFO. Meanwhile, the FFO has only been growing at around 8% a year, which could suggest that the share is a tad expensive.

In the REIT’s favour, though, is a low level of debt. CapitaMall Trust has total debts of S$2.9b compared to Total Equity of S$6.1b. That is not too bad. Meanwhile, it has S$874m of cash in the bank, which is also quite favourable.

Dividends or distribution units are one of the main attractions of REITs. CapitaMall Trust has paid out S$359m in dividends on common and preferred stock. This represented around 57% of its Net Income. Additionally, the payout has increased around 4% a year since 2009.

On balance, CapitaMall Trust could be seen as a study income share. But there probably is not quite enough excitement in the Real Estate Investment Trust to whet Lynch’s appetite.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.