Saturday, September 24, 2011

ARA Asset Management

Last Friday, I divested GRP (I may buy in again) and bought shares of ARA Asset Management with a longer time horizon. At the moment, ARA Asset Management is trading to new one year low with P/E 15x. For me, I am planning to buy in batches and average down should the price of ARA Asset Management becomes more attractive.

About ARA
ARA Asset Management is an Asian real estate fund management company focusing mainly on the management of REITS and private real estate funds. ARA currently manages REITS listed in Singapore, Malaysia, and Hong Kong with a diversified portfolio of retail, office, industrial and logistics; private funds investing in real estate and real estate securities in Asia.

Here are quick 5 pointers why I chose ARA Asset Management:


1) Growth of Asian REITS
According to industry chamber Assocham, Asian REITS currently accounts for 10.6% of global REITS and expected to grow to US$500 billion in 8-10 years time, a projected figure of USS$100m billion from 2010. Majority of revenue (FY2010 reports 41%) of ARA is from REITS management fees, thus ARA is well positioned to maximize opportunities mid to long term. Indirectly, ARA could benefit from Singapore's aim of being the world's leading wealth management hub, overtaking Switzerland & London. This in turn attract rich private investors to park their monies in funds - one of which is properties. Already, Europe and America are facing troubled times, especially Greece debt situation.

2) Unique Business Model
ARA is asset light and does not own any properties but earn recurring income from managing it, appointing REITS Manager to take care of day-to-day operations. As long as Asian REITS exist or ARA wishes to create a new REIT in Asia to capitalize opportunities in rental income (e.g. buying distressed properties during economic slowdown), a portion will be made payable as "management fees" to ARA. In addition, ARA is not subjected to redemption issues - no matter what happens, someone will have to own the REITS and the Manager can't dump the assets. ARA also earns the fees from private real estate funds such as Harmony and Dragon. As of June 2011, AUM (assets under management) reaches S$18.8 billion.

3) Clean balance sheet, consistent earnings and high ROE
Using the data from Share Investor and my primary calculation, the average net earnings margin and ROE from 2007-2010 inclusive is 54.9% and 39.2% respectively. Debt-free with a cash of S$40 million with double digit FCF (free cash flow).

4) Strong Sponsor
Cheung Kong Holdings owned by Li-Ka Shing has a 15.7% stake in ARA as of now. ARA is a joint collaboration between John Lim and Cheung Kong Holdings.

5) People
This will be a little subjective - to each and every individual point of view. From my opinion, I view the management astute to some extent. Under the stewardship of John Lim, AUM rose to S$18.8billion and ARA was chosen by Forbes Asia 2010: "Asia's best 200 companies under a billion market capitalization". John Lim emphasizes strong values in ARA. There are other compelling reasons but I shall leave them for you to decide - please feel free to put in your comments.

Of course, there are risks and disadvantages of investing in ARA Asset Management. Which company does not? We can think of 101 reasons of good and bad - the most important question is "does ARA fits into your overall investment objective and profile".

Now, I will look forward to the future growth of ARA, having it as part of my portfolio that focuses on capital appreciation.

6 comments:

  1. Hi Ken, thks for writing the post. Can you highlight the risks as well?

    thks

    kenne

    ReplyDelete
  2. Hi Kenne

    Thanks for visiting my blog :)

    In my opinion, there are a few risks associated with ARA but I will like to highlight one external factor:

    1) Property cycle and macro-economic conditions

    ARA is affected if property prices plunge down and the cycle is on a downtrend due to economic slowdown. When this happens, the overall landscape is affected which may result in a decrease of rental income; the impact depends on the type of REITS (i.e. mix of office, retail or office only). The REITS management fees will be at a lower rate which will influence ARA's income earned.

    But if rental revisions happen when the economy improves, the price of properties will rise - facilitated by future asset enhancement and acquisition under each REIT managed by ARA.

    ReplyDelete
  3. Hi Ken,

    Thks for the info. How do u rate CMA then?

    kenne

    ReplyDelete
  4. Hi Kenne

    Thanks for dropping by.

    Unfortunately, I do not have any comments on CMA as I yet to study the qualitative aspects of it.

    Sorry, can't be much help.

    ReplyDelete
  5. This is interesting. I do find this idea very fresh and useful too.
    llc

    ReplyDelete
    Replies
    1. Hi Paul

      Could you kindly enlighten me - which idea are you referring to?

      Thanks!

      Delete

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