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Looking at ARA Asset Management Limited through the Eyes of an Investing Master

ARA Asset Management

Peter Lynch has one of the best track records out there as a money manager when he led the Fidelity Magellan Fund in the USA to 29% annualised returns from 1977 to 1990, the year he retired.

Under his watch, the Magellan Fund grew every $1,000 in 1977 into $27,000 by 1990. That’s a tremendous achievement, which makes Lynch’s thoughts on investing well-worth noting.

In One Up on Wall Street, Lynch penned down how he went about investing in stocks and the book contained an invaluable checklist that he had used to evaluate companies for their investment merits.

Healthcare operator Raffles Medical Group and food & beverage retailer Breadtalk have both being put through the wringer that is Lynch’s checklist. Let’s see how real estate fund management company ARA Asset Management (SGX: D1R) would fare.

1) The Price-Earnings Ratio: Is it low or high for this particular company and for similar companies in the same industry? (Generally, low PEs are preferred)

ARA’s currently selling for 22.4 times trailing earnings at its current share price of S$1.85. That’s almost twice as high as the Straits Times Index’s (SGX: ^STI) trailing PE ratio of 12.3.

ARA’s main business involves the management of publicly-listed real estate investment trusts and private real estate funds. The company also provides real estate management and corporate finance advisory services. I was unable to find locally-listed companies that are direct competitors of ARA, but there are a few names that come to mind that do have somewhat similar activities.

CapitaMalls Asia (SGX: JS8) and Keppel Land (SGX: K11) are both real estate developers and managers that also provide REIT & fund management services.

Company

Price

Trailing PE ratio

CapitaMalls Asia

S$1.92

13.1

Keppel Land

S$3.23

5.9

Straits Times Index

3,133

12.3

ARA Asset Management

S$1.85

22.4

Source: S&P Capital IQ

Based on the table above, we can see how ARA has a much higher PE compared to the market as well as its peers.

2) What is the percentage of institutional ownership? The lower the better

John Lim, chief executive of ARA, owns around 19% of the company, while strategic investors like Cheung Kong Investment Company Limited and Straits Trading Company (SGX: S20) have stakes of around 8% and 20% respectively.

In contrast, there aren’t any institutional investors (essentially big fund management companies) with stakes that are remotely close to that of John Lim or Straits Trading Company. The investment management firm Matthews International Capital Management LLC has the biggest ownership of ARA among institutional investors with a 10% stake.

3) Are insiders buying and whether the company itself is buying back its own shares? Both are positive signs

There have been no bouts of any sustained buying by insiders of the company within the past six months, and ARA itself has not been buying back its own shares either.

4) What is the record of earnings growth and whether the earnings are sporadic or consistent?

ARA first became a publicly-listed company back in Nov 2007 and since then, has displayed consistent profitability with steady growth in earnings.

Net Income

Year

Year-on-Year % Change

S$34m

2007

S$36.7m

2008

7.9%

S$48.3m

2009

31.7%

S$63.8m

2010

32.1%

S$68.2m

2011

6.9%

S$72.7m

2012

6.6%

S$69.8m

Last 12 months

2.2%

Source: S&P Capital IQ

5) Does the company have a strong balance sheet?

ARA’s balance sheet has been very strong over the years. Currently, it carries a total debt load of S$22.8m while having S$40.1m in cash, giving it a net-cash position of S$17.3m.

6) Does the company have room to grow?

To answer this question, we’ll have to turn to how ARA gets paid for all the services it provides.

ARA Asset Management

Source: ARA Asset Management’s earnings presentation for the third quarter of 2013

From the chart above, we can see that there are many levers ARA can pull to provide growth. For instance, if the gross property value of the REITs it manages increases every year due to better management and a benign macroeconomic environment, ARA can bring in higher base fees.

In another scenario, if it manages to grow its assets under management for its private real estate funds by attracting new investors, it can grow its portfolio management fees under the segment.

Those are just two of the many ways that the company can boost its management fees as well as recurrent and one-off revenue streams. So, to answer the question, it’s likely that there’s room for the company to grow.

Foolish Bottom Line

ARA only scores three points out of a possible six by having low institutional ownership, consistent historical earnings growth, and having room to grow in the future. Thus, on balance, it’s unlikely that ARA would appear on Lynch’s radar.

At the same time however, investors ought to bear in mind that as useful as Lynch’s checklist is, there are still other aspects  of ARA’s business that we should uncover (its cash flow situation, for instance) before we can have a more complete picture of its investment merits, if any.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.