Would Warren Buffett Buy Frasers Centrepoint Trust?

Warren Buffett is not averse to investing in property. His overarching objective is to determine the yield on an asset over the lifetime of the asset.

He assesses investments against certain criteria that could help determine if the cash flow from the asset is sustainable. So how does Frasers Centrepoint Trust (SGX: J69U) figure?

FCT is a Real Estate Investment Trust. It owns six retail malls in Singapore in addition to a 31% stake in Hektar REIT (KLSE: 5121.KL), which owns shopping malls in Malaysia.

FCT has demonstrated an ability to deliver progressively rising bottom-line profits. Its median Net Income is around S$155 million. Last year’s Net Income was S$171 million. Low earnings volatility is likely to appeal to Warren.

The REIT’s Net Income Margin has also been consistently high at around 92%. Last year it made S$89 of bottom-line profit on every $100 of revenues. A high margin could be a sign that the company has pricing power.

Unsurprisingly FCT is not especially efficient in terms of its Asset Turnover. But there is good reason. Shopping malls are expensive assets. Consequently, FCT is only able to generate S$8 of sales on every $100 of asset at its disposal.

That said, FCT is quite efficient in terms of generating Free Cash Flow. Additionally, its cash flow more than covers the dividend payout, which has risen steadily since 2007.

Buffett also likes companies that have low macroeconomic risks. In particular he prefers companies with low levels of borrowing. In his view, a company that has borrowed excessively could be at risk from interest rates increases, which are outside of the control of the company.

Frasers Centrepoint Trust has Total Assets of S$2.6 billion and Total Liabilities of S$867 million. That equates to a Leverage Ratio of 1.5, which is below the median for the 30 companies that make up the Straits Times Index (SGX: ^STI).

On balance, Frasers Centrepoint Trust has many of the attributes that Warren Buffett would look for in a company. He might just give it the thumbs up.

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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.