Yahoo Finance Investing In Workspace Group plc (LON:WKP): What You Need To Know
Workspace Group plc is a UK£1.7b mid-cap, real estate investment trust (REIT) based in London, United Kingdom. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. In this commentary, I’ll take you through some of the things I look at when assessing WKP.
View our latest analysis for Workspace Group
REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of WKP’s daily operations. For WKP, its FFO of UK£74m makes up 78% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether WKP 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 WKP to pay off its debt using its income from its main business activities, and gives us an insight into WKP’s ability to service its borrowings. With a ratio of 13%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take WKP 7.42 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.
I also look at WKP’s interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it’s better to use FFO divided by net interest. With an interest coverage ratio of 3.95x, it’s safe to say WKP is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at WKP’s valuation relative to other REITs in United Kingdom by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. WKP’s price-to-FFO is 22.3x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
Next Steps:
Workspace Group can bring diversification into your portfolio due to its unique REIT characteristics. Before you make a decision on the stock today, keep in mind I’ve only covered one metric in this article, the FFO, which is by no means comprehensive. I’d strongly recommend continuing your research on the following areas I believe are key fundamentals for WKP:
Future Outlook: What are well-informed industry analysts predicting for WKP’s future growth? Take a look at our free research report of analyst consensus for WKP’s outlook.
Valuation: What is WKP 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 WKP 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.
