The Motley Fool

Is Folkestone Education Trust a buy at today’s share price?

Folkestone Education Trust (ASX: FET) has surprisingly been one of the best-performing stocks on the ASX over the past decade, delivering average annual growth of 13.9% in shareholder returns.

That compares to the S&P/ASX 300 A-REIT Index’s return of 2.9%.

For that reason alone, investors should have the company on a watchlist.

What does Folkestone do?

Folkestone is a real estate investment trust (A-REIT) focused on the early learning and child care centre sector. The company owns 393 early learning properties and assets under management of $753.6 million. Its tenants include GoodStart (59%), Best Start Educare (9%) and G8 Education Limited (ASX: GEM).

folkestone-education-tenant-profile

Source: Company presentation

 

Are Folkestone shares cheap?

At the current price of $2.67, Folkestone shares are trading on a P/E of around 19x, based on distributable income (excluding property revaluation gains), and a premium to its net tangible assets of $2.14. On that basis, it doesn’t appear cheap, but it’s important to realise that distributable income rose 16.2% last financial year, and distributions (dividends) have grown consistently since 2011. The trust expects more growth in the 2017 financial year too – forecasting 6% growth to 14.2 cents per unit.

Distributions (Dividends)

At the current price and considering the 13.4 cents paid last financial year, Folkestone’s shares are yielding 5% (unfranked), but FY17’s yield is expected to be 5.3%. That may not seem like much, but it’s important to realise that Folkestone has seen its net tangible assets grow at double-digit rates over the past 4 years and its share price rise 214% in the past two years.

Investors are not only getting a decent yield, but are also receiving substantial capital gains.

Foolish takeaway

Folkestone has sensible levels of debt for an A-REIT, has delivered strong shareholder returns in the past and is likely to continue delivering in future. For those investors looking for an alternative to G8 Education, this could be the one. And with demand for child care likely to continue rising, Foolish investors might want to add this company to their watchlist.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.