Since its listing on November 2007, ARA Asset Management Limited (SGX: D1R) has managed to solidly beat the market with a 97% gain to its current price of S$1.70. Within the same time frame, Singapore’s market benchmark, the Straits Times Index (SGX: ^STI), had actually clocked a loss of 13%. What’s up next? But, can the company’s shares continue to be the impressive market-beater that it is going forward? For an answer to the question, we can turn to ARA Asset Management’s valuation, keeping in mind that shares with low valuations are generally preferred over ones with high valuations.
Since its listing on November 2007, ARA Asset Management Limited (SGX: D1R) has managed to solidly beat the market with a 97% gain to its current price of S$1.70. Within the same time frame, Singapore’s market benchmark, the Straits Times Index (SGX: ^STI), had actually clocked a loss of 13%.
What’s up next?
But, can the company’s shares continue to be the impressive market-beater that it is going forward? For an answer to the question, we can turn to ARA Asset Management’s valuation, keeping in mind that shares with low valuations are generally preferred over ones with high valuations.
Source: S&P Capital IQ
At ARA Asset Management’s current price, its trailing price/earnings (PE) ratio of 18 is a tad higher than the long-term average figure (going back to November 2007) of 16. In addition, the company’s current valuation also does not compare favourably with that of the SPDR STI ETF (SGX: ES3). The exchange-traded fund, which tracks the Straits Times Index, is valued at around 13.5 times its trailing earnings.
Such valuation figures suggest that ARA Asset Management might actually be a pricey share. But, we can’t just look at PE ratios alone without considering the company’s business-future. Indeed, a cheap-looking share with a low valuation can still turn out to be an expensive mistake if the company’s business deteriorates; along the same vein, an expensive-looking share could still turn out to be a great investment if its business manages to grow substantially.
Banking on buildings for success
With ARA Asset Management, there’re reasons to be optimistic about its business. The company is a manager of private real estate funds and publicly-listed real estate investment trusts (REIT). The company also manages properties and provides corporate advisory services.
One of the key drivers of the company’s business is the growth in its assets under management (AUM). Since its listing, ARA Asset Management’s AUM has grown at an impressive compounded annual rate of 16.6% from S$9.5 billion (as of December 2007) to S$25.8 billion as of 30 June 2014.
Despite such success, the concept of “resting on one’s laurels” seems to be alien concept for ARA Asset Management as its Chief Executive, John Lim, has a goal of growing the company’s AUM to S$40 billion by 2016.
There’s still a significant gap for the company’s AUM to close between now and then, so that could be a source of future growth.
As part of its efforts to grow its AUM, the company expanded the geographical reach of its private real estate fund operations into Australia in the second quarter of 2014. In the same quarter, ARA Asset Management had also acquired a South Korea-based real estate management company which manages two privately-held Korean Real Estate Investment Trusts. This would be the first time the company has managed South Korean assets and it is an area which the company is “working towards expanding.”
With the importance that a growing AUM has on the company’s future, the ability of the company to attract investors to invest in its real estate funds would be of major significance. On that front, ARA Asset Management does have a great track record which be used as a magnet. For instance, just two weeks ago, the company announced that its ARA Harmony Fund had just crossed its initial five-year term in its fund cycle. During that block of time, the fund had delivered “an internal rate of return… of 27.4% with an equity multiple of 3.15 times for its investors [before fees].” For anyone wondering, those are very impressive returns.
Foolish Bottom Line
There are certainly things to like with ARA Asset Management’s future. But, there are also risks to consider.
As of 30 June 2014, REITs comprise 75% of the company’s AUM. And of that, roughly three-quarters belong to REITs listed in Singapore. Earlier in the month, the Monetary Authority of Singapore (MAS) had proposed a number of changes to regulations governing REITs here. Amongst the proposed changes are ones which deal with a REIT Manager’s management fees and acquisition and divestment fees. Given that such fees make up the bread-and-butter of ARA Asset Management’s business, any adverse changes to them (from the vantage point of a REIT Manager) could spell trouble for the company.
Investors might also want to keep an eye on recent political unrest in Hong Kong. A number of REITs and private real estate funds managed by ARA Asset Management own properties in the territory. If Hong Kong and China’s relationship deteriorates and remains so for prolonged periods of time, these funds might see impaired performance which in turn, would affect ARA Asset Management’s business.
All told, investors would have to weigh the risks and rewards with this share in order to come up with an intelligent investing decision.
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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.