Intrinsic value of Pure Industrial Real Estate Trust - AAR-UN

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$6.07

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$6.07

 
Intrinsic value

$3.00

 
Up/down potential

-51%

 
Rating

str. sell

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of AAR-UN stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.5

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  9.36
  18.20
  16.88
  15.69
  14.62
  13.66
  12.79
  12.02
  11.31
  10.68
  10.11
  9.60
  9.14
  8.73
  8.36
  8.02
  7.72
  7.45
  7.20
  6.98
  6.78
  6.60
  6.44
  6.30
  6.17
  6.05
  5.95
  5.85
  5.77
  5.69
  5.62
Revenue, $m
  187
  221
  258
  299
  343
  389
  439
  492
  548
  606
  667
  732
  798
  868
  941
  1,016
  1,094
  1,176
  1,261
  1,349
  1,440
  1,535
  1,634
  1,737
  1,844
  1,956
  2,072
  2,194
  2,320
  2,452
  2,590
Variable operating expenses, $m
 
  55
  65
  75
  86
  98
  110
  123
  137
  152
  168
  184
  200
  218
  236
  255
  275
  295
  316
  339
  361
  385
  410
  436
  463
  491
  520
  551
  582
  615
  650
Fixed operating expenses, $m
 
  15
  16
  16
  17
  17
  17
  18
  18
  19
  19
  20
  20
  21
  21
  22
  22
  23
  23
  24
  25
  25
  26
  26
  27
  28
  29
  29
  30
  31
  31
Total operating expenses, $m
  62
  70
  81
  91
  103
  115
  127
  141
  155
  171
  187
  204
  220
  239
  257
  277
  297
  318
  339
  363
  386
  410
  436
  462
  490
  519
  549
  580
  612
  646
  681
Operating income, $m
  125
  150
  178
  208
  240
  275
  312
  351
  392
  435
  481
  528
  578
  630
  683
  739
  798
  858
  921
  986
  1,054
  1,125
  1,198
  1,275
  1,354
  1,437
  1,524
  1,614
  1,708
  1,806
  1,908
EBITDA, $m
  125
  150
  178
  208
  240
  275
  312
  351
  392
  435
  481
  528
  578
  630
  683
  739
  798
  858
  921
  986
  1,054
  1,125
  1,198
  1,275
  1,354
  1,437
  1,524
  1,614
  1,708
  1,806
  1,908
Interest expense (income), $m
  38
  36
  44
  52
  61
  71
  81
  92
  103
  116
  128
  142
  156
  170
  186
  202
  218
  235
  253
  272
  291
  311
  332
  354
  376
  400
  424
  450
  476
  504
  533
Earnings before tax, $m
  158
  114
  134
  156
  179
  204
  231
  259
  289
  320
  352
  386
  422
  459
  498
  538
  579
  623
  668
  714
  763
  814
  866
  921
  978
  1,038
  1,100
  1,164
  1,232
  1,302
  1,376
Tax expense, $m
  5
  31
  36
  42
  48
  55
  62
  70
  78
  86
  95
  104
  114
  124
  134
  145
  156
  168
  180
  193
  206
  220
  234
  249
  264
  280
  297
  314
  333
  352
  371
Net income, $m
  148
  83
  98
  114
  131
  149
  168
  189
  211
  233
  257
  282
  308
  335
  363
  393
  423
  455
  487
  522
  557
  594
  632
  672
  714
  757
  803
  850
  899
  951
  1,004

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  59
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  2,517
  2,908
  3,399
  3,933
  4,508
  5,124
  5,779
  6,473
  7,206
  7,976
  8,782
  9,625
  10,505
  11,422
  12,377
  13,369
  14,401
  15,473
  16,588
  17,746
  18,950
  20,201
  21,503
  22,858
  24,268
  25,737
  27,268
  28,863
  30,528
  32,265
  34,079
Adjusted assets (=assets-cash), $m
  2,458
  2,908
  3,399
  3,933
  4,508
  5,124
  5,779
  6,473
  7,206
  7,976
  8,782
  9,625
  10,505
  11,422
  12,377
  13,369
  14,401
  15,473
  16,588
  17,746
  18,950
  20,201
  21,503
  22,858
  24,268
  25,737
  27,268
  28,863
  30,528
  32,265
  34,079
Revenue / Adjusted assets
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
  0.076
Average production assets, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Working capital, $m
  43
  83
  97
  112
  128
  146
  164
  184
  205
  227
  250
  274
  299
  325
  352
  380
  409
  440
  471
  504
  539
  574
  611
  650
  690
  732
  775
  820
  868
  917
  969
Total debt, $m
  1,044
  1,189
  1,410
  1,650
  1,908
  2,186
  2,481
  2,793
  3,123
  3,469
  3,832
  4,211
  4,607
  5,020
  5,450
  5,896
  6,361
  6,843
  7,344
  7,866
  8,407
  8,971
  9,556
  10,166
  10,801
  11,462
  12,150
  12,869
  13,618
  14,399
  15,216
Total liabilities, $m
  1,164
  1,309
  1,530
  1,770
  2,028
  2,306
  2,601
  2,913
  3,243
  3,589
  3,952
  4,331
  4,727
  5,140
  5,570
  6,016
  6,481
  6,963
  7,464
  7,986
  8,527
  9,091
  9,676
  10,286
  10,921
  11,582
  12,270
  12,989
  13,738
  14,519
  15,336
Total equity, $m
  1,353
  1,600
  1,870
  2,163
  2,479
  2,818
  3,178
  3,560
  3,963
  4,387
  4,830
  5,294
  5,778
  6,282
  6,807
  7,353
  7,921
  8,510
  9,123
  9,760
  10,422
  11,111
  11,827
  12,572
  13,347
  14,155
  14,997
  15,875
  16,791
  17,746
  18,744
Total liabilities and equity, $m
  2,517
  2,909
  3,400
  3,933
  4,507
  5,124
  5,779
  6,473
  7,206
  7,976
  8,782
  9,625
  10,505
  11,422
  12,377
  13,369
  14,402
  15,473
  16,587
  17,746
  18,949
  20,202
  21,503
  22,858
  24,268
  25,737
  27,267
  28,864
  30,529
  32,265
  34,080
Debt-to-equity ratio
  0.772
  0.740
  0.750
  0.760
  0.770
  0.780
  0.780
  0.780
  0.790
  0.790
  0.790
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.800
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
  0.810
Adjusted equity ratio
  0.526
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550
  0.550

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  148
  83
  98
  114
  131
  149
  168
  189
  211
  233
  257
  282
  308
  335
  363
  393
  423
  455
  487
  522
  557
  594
  632
  672
  714
  757
  803
  850
  899
  951
  1,004
Depreciation, amort., depletion, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Funds from operations, $m
  68
  83
  98
  114
  131
  149
  168
  189
  211
  233
  257
  282
  308
  335
  363
  393
  423
  455
  487
  522
  557
  594
  632
  672
  714
  757
  803
  850
  899
  951
  1,004
Change in working capital, $m
  -29
  13
  14
  15
  16
  18
  19
  20
  21
  22
  23
  24
  25
  26
  27
  28
  29
  30
  32
  33
  34
  36
  37
  39
  40
  42
  44
  45
  47
  49
  52
Cash from operations, $m
  97
  70
  84
  98
  114
  131
  150
  169
  190
  212
  234
  258
  283
  309
  336
  364
  394
  424
  456
  489
  523
  558
  595
  634
  674
  716
  759
  805
  852
  901
  953
Maintenance CAPEX, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
New CAPEX, $m
  -344
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from investing activities, $m
  -308
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Free cash flow, $m
  -211
  70
  84
  98
  114
  131
  150
  169
  190
  212
  234
  258
  283
  309
  336
  364
  394
  424
  456
  489
  523
  558
  595
  634
  674
  716
  759
  805
  852
  901
  953
Issuance/(repayment) of debt, $m
  44
  204
  221
  240
  259
  277
  295
  312
  330
  346
  363
  379
  396
  413
  429
  447
  464
  483
  501
  521
  542
  563
  586
  610
  635
  661
  689
  718
  749
  782
  816
Issuance/(repurchase) of shares, $m
  276
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  322
  204
  221
  240
  259
  277
  295
  312
  330
  346
  363
  379
  396
  413
  429
  447
  464
  483
  501
  521
  542
  563
  586
  610
  635
  661
  689
  718
  749
  782
  816
Total cash flow (excl. dividends), $m
  111
  274
  305
  338
  373
  409
  445
  482
  519
  558
  597
  638
  679
  722
  766
  811
  858
  907
  957
  1,010
  1,065
  1,122
  1,181
  1,243
  1,309
  1,377
  1,448
  1,523
  1,601
  1,683
  1,769
Retained Cash Flow (-), $m
  -350
  -247
  -270
  -293
  -316
  -339
  -361
  -382
  -403
  -423
  -444
  -464
  -484
  -504
  -525
  -546
  -567
  -590
  -613
  -637
  -662
  -688
  -716
  -745
  -776
  -808
  -842
  -878
  -916
  -956
  -998
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  27
  35
  45
  57
  70
  84
  100
  117
  135
  154
  174
  195
  217
  241
  265
  290
  317
  344
  373
  402
  433
  465
  498
  533
  569
  606
  645
  685
  727
  771
Discount rate, %
 
  7.80
  8.19
  8.60
  9.03
  9.48
  9.95
  10.45
  10.98
  11.52
  12.10
  12.71
  13.34
  14.01
  14.71
  15.44
  16.22
  17.03
  17.88
  18.77
  19.71
  20.70
  21.73
  22.82
  23.96
  25.16
  26.41
  27.73
  29.12
  30.58
  32.11
PV of cash for distribution, $m
 
  25
  30
  35
  40
  44
  48
  50
  51
  50
  49
  47
  43
  40
  35
  31
  26
  22
  18
  14
  11
  8
  6
  4
  3
  2
  1
  1
  1
  0
  0
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Pure Industrial Real Estate Trust is an independent equity real estate investment trust. The firm acquires, owns, and operates a diversified portfolio of income producing industrial properties in primary industrial markets. It invests in the real estate markets of Canada. Pure Industrial Real Estate Trust was founded in June 2007 and is headquartered in Vancouver, Canada.

FINANCIAL RATIOS  of  Pure Industrial Real Estate Trust (AAR-UN)

Valuation Ratios
P/E Ratio 10.1
Price to Sales 8
Price to Book 1.1
Price to Tangible Book
Price to Cash Flow 15.4
Price to Free Cash Flow -6
Growth Rates
Sales Growth Rate 9.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 65.4%
Cap. Spend. - 3 Yr. Gr. Rate -10.7%
Financial Strength
Quick Ratio 1
Current Ratio 0.7
LT Debt to Equity 70.8%
Total Debt to Equity 77.2%
Interest Coverage 5
Management Effectiveness
Return On Assets 8%
Ret/ On Assets - 3 Yr. Avg. 8.8%
Return On Total Capital 6.7%
Ret/ On T. Cap. - 3 Yr. Avg. 7.1%
Return On Equity 12.6%
Return On Equity - 3 Yr. Avg. 14.2%
Asset Turnover 0.1
Profitability Ratios
Gross Margin 91.4%
Gross Margin - 3 Yr. Avg. 91.7%
EBITDA Margin 104.8%
EBITDA Margin - 3 Yr. Avg. 107.2%
Operating Margin 66.8%
Oper. Margin - 3 Yr. Avg. 66.7%
Pre-Tax Margin 84.5%
Pre-Tax Margin - 3 Yr. Avg. 84.9%
Net Profit Margin 79.1%
Net Profit Margin - 3 Yr. Avg. 79.8%
Effective Tax Rate 3.2%
Eff/ Tax Rate - 3 Yr. Avg. 4%
Payout Ratio 45.3%

AAR-UN stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the AAR-UN stock intrinsic value calculation we used $187 million for the last fiscal year's total revenue generated by Pure Industrial Real Estate Trust. The default revenue input number comes from 2016 income statement of Pure Industrial Real Estate Trust. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our AAR-UN stock valuation model: a) initial revenue growth rate of 18.2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 7.8%, whose default value for AAR-UN is calculated based on our internal credit rating of Pure Industrial Real Estate Trust, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Pure Industrial Real Estate Trust.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of AAR-UN stock the variable cost ratio is equal to 25.1%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $15 million in the base year in the intrinsic value calculation for AAR-UN stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.7% for Pure Industrial Real Estate Trust.

Corporate tax rate of 27% is the nominal tax rate for Pure Industrial Real Estate Trust. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the AAR-UN stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for AAR-UN are equal to 0%.

Life of production assets of 10 years is the average useful life of capital assets used in Pure Industrial Real Estate Trust operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for AAR-UN is equal to 37.4%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $1353 million for Pure Industrial Real Estate Trust - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 245.47 million for Pure Industrial Real Estate Trust is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Pure Industrial Real Estate Trust at the current share price and the inputted number of shares is $1.5 billion.


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Stock chart of AAR-UN Financial statements of AAR-UN
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The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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