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A Closer Look at This 562% Winner

ARA Asset Management Limited (SGX:D1R) has been a big winner over the last five plus years. The share price has recorded returns of about 562% from 1 Jan 2009 to the closing price on 1 October 2014 (excluding bonus issues). In comparison, the capital gain returns of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was 75.5% for the same duration. Over the past five financial years, the asset manager paid out a total of about 21 Singapore cents in dividends. My fellow Fool Ser Jing has more information about the dividends here.

While the returns from ARA Asset Management has been towering — as Foolish investors, we should look behind the curtains to understand what the business drivers for this move in the share price.

A Closer Look

ARA graph 1

Source: Company Earnings Report

The business segments for the company are the Real Estate Investment Trusts (REIT), the Private Real Estate Funds, and the Real Estate Management Services. The REIT business segment covers REITs listed in Singapore, Hong Kong and Malaysia. Examples of REITs under its management would be Suntec REIT (SGX: T82U), Fortune REIT (SGX: F25U), and Cache Logistics Trust (SGX: K2LU).

The private real estate funds business segment covers real estate investments in Asia. Among the private real estate businesses, ARA Asset Management has partnerships with another SGX-Listed company, The Straits Trading Company Limited (SGX:S20). The third business segment would be the Real Estate Management Services business segment. This segment consists of fees earned from property management, and convention & exhibition services; both mainly related to the Suntec City. Finally, the Investment Holdings business segment includes a portfolio of listed securities in REITs and private real estate funds.

Moving on, revenue from the REITs business segment contributed 56.5% of total sales for the financial year ended 2013 (the calendar year lines up with the financial year). This business segment also drove sales growth in the past five plus years. Another significant driver of sales growth would be the Real Estate Management Services. Its uptick in revenue from 2009 onwards came from its acquisition of APM Property Management Pte. Ltd. which mainly manages properties owned by Suntec REIT, and the management of Suntec City MCST. This business segment grew by 45% in 2013, and came in at around 18% of revenue.

It is also noteworthy that management fees across the business segments are recurrent in nature. For 2013, the company made $114 million in management fees, or 81.2% of total sales.

We would ideally like to see the revenue dollars drip down to the bottom line. For that, we look into the profitability of the business segments.

ARA graph 2

Source: Company Earnings Report

Note:* Profit before share of profit of associates, income tax and non-controlling interests

Again, the REITs business segment is where the company derives most of its profits, bringing in 57% of profits for 2013. The growth in profits over the past five years were mainly driven by the real estate management services business segment, the investment holdings business segment, and the REITs business segment. For 2013, ARA Asset Management clocked in a healthy nett income margin north of 50%.

Finally, Foolish investors would look for the accumulated profits have to end up on the balance sheet in the end. To do this, we look at the cash and debt development.

ARA graph 3

Source: Company Earnings Report

The company has remained net cash positive. Its nett cash position reduced significantly in the past year likely due to the settlement of the remaining payment for ARA’s acquisition of a 51% stake in SC Property Management.

Foolish take away

As lifelong students of Foolish long term investing, it pays to look under the hood to understand whether a rise in the company’s share price is supported by the quality of growth that we are looking for.

Given the steady track record of the company, we might want to keep tabs on the growth of the assets under management (AUM). The AUM stood at $25.5 billion at the end of 2013. The company has also set an AUM target of $40 billion by 2016.

On the flipside, Foolish investors might also want to note that the valuations of the properties  play a part in the company’s fees. As such, it may be subject fluctuations due to property revaluation. In line with this, the management fees which the company receives can also come in the form of REIT units, and may be subject to unit share prices. The operating cashflow for 2013 fell to $47.6 million from $81.7 million, in part due to lower proceeds from REIT unit sales.

As of Monday’s close of $1.79, ARA Asset Management traded at a price-to-earnings ratio of about 18.7 and has a dividend yield of around 2.8%. Read more company analyses by signing up for a FREE subscription to The Motley Fool’s weekly investing newsletter, Take Stock SingaporeSign up here to learn how you can invest in the share market and grow your wealth in the years ahead.

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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 contributor Chin Hui Leong owns shares in ARA Asset Management and Suntec REIT.