Yahoo Finance Investing In Derwent London Plc (LON:DLN): What You Need To Know
Derwent London Plc is a UK£3.31b mid-cap, real estate investment trust (REIT) based in London, United Kingdom. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how DLN’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 DLN.
See our latest analysis for Derwent London
Funds from Operations (FFO) is a higher quality measure of DLN’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 DLN, its FFO of UK£83.5m makes up 50.6% of its gross profit, which means over a third of its earnings are high-quality and recurring.
In order to understand whether DLN has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take DLN to pay off its debt using its income from its main business activities, and gives us an insight into DLN’s ability to service its borrowings. With a ratio of 11.1%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take DLN 9.02 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.
Next, interest coverage ratio shows how many times DLN’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 4.72x, it’s safe to say DLN is generating an appropriate amount of cash from its borrowings.
In terms of valuing DLN, 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. DLN’s price-to-FFO is 39.61x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
Next Steps:
As a REIT, Derwent London offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in DLN, I highly recommend taking a look at other aspects of the stock to consider:
Future Outlook: What are well-informed industry analysts predicting for DLN’s future growth? Take a look at our free research report of analyst consensus for DLN’s outlook.
Valuation: What is DLN worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether DLN is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
