Sunway Real Estate Investment Trust (KLSE:SUNREIT) is up, but the financial outlook looks weak: is the stock overvalued?

Sunway Real Estate Investment Trust (KLSE:SUNREIT) has had a great run in the equity market, with its stock rising 12% in the past three months. However, we have decided to pay close attention to its weak financials as we doubt the current momentum will continue given the scenario. Specifically, we decided to study the ROE of Sunway Real Estate Investment Trust in this article.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.

Check out our latest analysis for Sunway Real Estate Investment Trust

How is ROE calculated?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Sunway Real Estate Investment Trust is:

3.6% = RM198 million ÷ RM5.5 billion (based on trailing twelve months to March 2022).

The “return” is the annual profit. Another way to think about this is that for every 1 MYR worth of equity, the company was able to make a profit of 0.04 MYR.

What is the relationship between ROE and earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Earnings growth and ROE of 3.6% from Sunway Real Estate Investment Trust

It is clear that the ROE of Sunway Real Estate Investment Trust is rather weak. An industry comparison shows that the company’s ROE is also not much different from the industry average of 4.2%. Therefore, it may not be wrong to say that the 25% decline in net income over five years seen by Sunway Real Estate Investment Trust was possibly the result of a disappointing ROE.

Then, when we compared with the industry, which cut profits at a rate of 10% over the same period, we still found that Sunway Real Estate Investment Trust’s performance was quite dismal, as the company cut profits faster than the industry.

KLSE:SUNREIT Past Earnings Growth May 24, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Is SUNREIT correctly valued? This intrinsic business value infographic has everything you need to know.

Does Sunway Real Estate Investment Trust effectively reinvest its profits?

Sunway Real Estate Investment Trust has a very high three-year median payout ratio of 68%, implying that it only keeps 32% of its profits. However, it is not uncommon to see a REIT with such a high payout ratio primarily due to legal requirements. So that probably explains the decline in the company’s profits.

Additionally, Sunway Real Estate Investment Trust has paid dividends over a period of at least ten years, which means the company’s management is committed to paying dividends even if it means little or no earnings growth. Our latest analyst data shows that the company’s future payout ratio is expected to reach 100% within the next three years. However, Sunway Real Estate Investment Trust’s future ROE is expected to reach 6.3% despite the company’s expected payout rate increase. We infer that there could be other factors that could be driving the company’s anticipated ROE growth.

Conclusion

Overall, the performance of Sunway Real Estate Investment Trust is quite disappointing. Because the company does not reinvest much in the business and given the low ROE, it is not surprising to see the lack or absence of profit growth. That being the case, the latest forecasts from industry analysts show that analysts are expecting a huge improvement in the company’s earnings growth rate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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