Investors, before parking their funds in a business, generally use several tools to analyse the business’ ability to generate what they care the most – cash. While some investors look at the top line and bottom-line growth, some pay particular attention to debt and borrowings of the business.
Let us discuss one of the most popular tools that seasoned investors and analysts use to measure a company’s ability to generate cash- Free Cash Flow. Free cash flow demonstrates the health and financial performance of a business.
Free Cash Flow (FCF) refers to the cash left with a company after making payments towards all its capital expenditure for a period such as purchase of new machinery, land, and buildings. Companies that have growing or positive FCF are generally believed to have a strong growth momentum, as the amount can be directed towards expansion, product development, making dividend payments or reducing debts. In simpler terms, a business with a healthy free cash flow is considered as a better option, owing to a promising future. More liquidity a business has, more room for making prudent capital allocation decision.
- Amount of Free Cash Flow with a business highlights its ability of making decisions regarding future growth opportunities or making distribution as dividends or stock buybacks, thereby enhancing shareholder value.
- FCF reflects a more transparent picture of the business as compared to earnings per share, owing to less chances of manipulation.
- A company with good working capital management has more room for generating strong free cash flows.
- Investors screen for companies that have growing or positive cash flows as one of their first steps, post that growth assumptions are made before deeming it undervalued or overvalued. In this backdrop, let us skim through recent market updates of few ASX-listed companies that boast positive or growing free cash flow.
Vicinity Centres (ASX:VCX)
Vicinity Centres (ASX:VCX) is an Australian REIT, which owns and manages shopping centres across the country. During the March 2020 quarter, the Company’s portfolio metrics highlighted the impacts of government initiatives undertaken to contain COVID-19, which included mandated store closures and ‘stay at home’ directives.
Subsequent to the quarter, the Company settled the acquisition of a 50% interest in Uni Hill Factory Outlets in April 2020.
Response to COVID-19
The Company has taken numerous measures in response to COVID-19, which mainly include the following:
- Reduced operating costs by decreasing Directors’ fees and Executive Committee salaries by 20% from April to June.
- Cancelled FY20 Short-Term Incentive program for all team members.
- VCX suspended FY20 earnings and distribution guidance, considering uncertainty around the duration and impact of COVID-19.
In March 2020, Moody’s reaffirmed the Company’s credit ratings at A2, while Standard & Poor’s in April 2020, reaffirmed the rating to A. VCX continues to operate within its financial covenants and ended the quarter with available liquidity of $1.3 billion. Over the span of 2015-2019, the Company reported a CAGR of 12.64% in Free Cash flow. VCX also has the flexibility to defer capital expenditure on major projects until COVID-19 uncertainties are resolved.
At the close of trading session on 12th May 2020, stock of VCX settled at $1.450 per share, indicating a decline of 3.01% against its previous closing price. The stock of VCX has provided shareholders with a return of 9.52% for the last one-month period.
Scentre Group (ASX:SCG)
Scentre Group (ASX:SCG), listed on ASX in June 2014, is engaged in property management and development. During Q1 FY20 ended 31 March 2020, all 42 Westfield Living Centres of the Company remained open and trading was undertaken with the implementation of highest level of health and safety standards. SCG rolled out numerous initiatives, which are targeting more than 25% reduction in centre operating expenses during the pandemic period.
Solid Liquidity Position: The Company has obtained additional unsecured bank facilities, in light of the COVID-19 pandemic and its impact on capital markets, globally. The new facilities boost SCG’s liquidity position to $3.1 billion, as of 1st April 2020. SCG has bonds and bank facilities amounting to $2.5 billion, which are due to mature on 31st December 2021. The Company ended the financial year 2019 with free cash flow amounting to $1.28 billion.
In order to further cement its financial position as well as ability to continue to deliver long-term returns to securityholders, the Company has decided not to pay interim distribution for 1H FY20. This decision follows the uncertainty arising from COVID-19, its duration, and the economic impact.
At the close of trading session on 12th May 2020, stock of SCG closed at $2.200 per share, indicating a decline of 3.509% against its previous closing price. The stock of SCG has provided shareholders with a return of 10.14% for the last one-month period.
Charter Hall Group (ASX:CHC)
Charter Hall Group (ASX:CHC) is an integrated property group, which mainly operates in property funds management, development, and property investment banking. The Company, in the month of March 2020, announced to have received the Charter Hall Office Trust final performance fee amounting to $148 million. CHC has available balance sheet liquidity of $350 million and gearing of 2.8% with the receipt of this fee. The Company registered a CAGR of 18.30% in Free Cash Flow during the time frame of 2015-2019.
During 1H FY20, Charter Hall reported a handsome financial number with operating earnings amounting to $225.8 million, reflecting a rise of 110% over pcp. The Company registered a statutory profit of $313.2 million, soaring 235% when compared with the same period a year ago. During the half-year period, the Company recorded a FUM growth of $8.5 billion.
Development completions amounted to $568 million of FUM in the last 12 months, according to the Company update in February 2020. CHC continues to use its cross-sector tenant relationships and the scale of its portfolio in order to create investment grade opportunities. This helps the Company in generating significant value by improving income yield and total returns for its funds.
CHC also reiterated its FY20 earnings guidance in March 2020, with post-tax operating earnings per security (OEPS) growth expected at around 40% as compared to FY19. Out of the $148 million performance fee received, the Company included $98 million in the FY20 guidance.
At the close of trading session on 12th May 2020, stock of CHC settled at $7.600 per share, indicating a drop of 1.427% against its previous closing price. The stock of CHC has provided shareholders with a return of 3.91% for the last one-month period.
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