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1 Quality Share That Could Be Worth a Deeper Look

In Singapore alone, there are more than 700 listed companies. Suffice to say it’d be tough to look through each and every share in our search for investing opportunities.

To help address these time and effort-constraints, my colleague Chin Hui Leong had recently shared a nine-point checklist which Pat Dorsey had come up with. Dorsey, who currently heads the investment firm Dorsey Asset Management, was previously the Director of Equity Research at Morningstar.

Dorsey’s checklist is designed to be completed in 10 minutes so that investors can effectively separate the wheat from the chaff and end up with a list of companies which stand a high chance of being good investing opportunities.

The nine points in Dorsey’s checklist are as follows:

  1. The firm provides regular financial updates, has a long track record as a publicly-listed entity, and a market capitalisation that isn’t too small.
  2. It has consistently earned an operating profit.
  3. It has generated consistent operating cashflow.
  4. The firm earns a good return on equity.
  5. It has been able to grow its earnings consistently.
  6. It possess a clean balance sheet.
  7. The firm can generates lots of free cash flow.
  8. There are infrequent appearance of one-time charges.
  9. There has not been major dilution of shareholders’ stakes in the firm.

If you’d like a deeper look as to why these criteria make sense, Hui Leong’s articles would be a great place to start (here they are again: Part 1, Part 2, and Part 3).

Keeping all these in mind, let’s jump to ARA Asset Management Limited (SGX: D1R) and see why this company has ticked off all the right boxes in Dorsey’s check-list.

ARA Asset Management is a real estate fund management outfit that’s been listed since November 2007. The company, which was co-founded by John Lim in July 2002, counts the management of private real estate funds and publicly-listed real estate investment trusts (REITs) as its bread and butter. Lim’s still currently serving as the company’s chief executive and owns a 19% stake in the firm.

In Singapore, REITs which are managed by ARA Asset Management include Suntec Real Estate Investment Trust (SGX: T82U) and Cache Logistics Trust (SGX: K2LU).

Since its listing, ARA Asset Management has managed to consistently generate operating and net profits, as well as operating and free cash flows; these can be easily seen from the chart immediately below. As extra gravy, all four financial metrics have also been climbing steadily upwards over time.

ARA Asset Management's operating profit, operating cash flow, free cash flow, and net income

Source: S&P Capital IQ

The next chart below plots out ARA Asset Management’s returns on equity and the amount of cash and total borrowings it has had over the years. As you can see, the firm has generated a phenomenal average return on equity of 42% (between 2007 and 2013), and it has done so with a remarkably strong balance sheet that has had minimal borrowings.

ARA Asset Management's returns on equity and balance sheet

Source: S&P Capital IQ

A quick glance at the firm’s financial filings over the years would also show that there has hardly been any one-time charges.

ARA Asset Management's share count

Source: S&P Capital IQ

As for Dorsey’s last criteria, it’s obvious to see from the chart immediately above that ARA Asset Management’s share count has remained constant since 2007, suggesting that the firm hasn’t been diluting existing shareholders at all.

A Fool’s take

It’s important to note that Dorsey’s nine-point checklist is meant to help narrow the field, and isn’t meant to be used to pick investment targets.

As fantastic as ARA Asset Management’s historical performance has been, there are still important risks for investors to consider about the company’s future. For instance, the Monetary Authority of Singapore’s proposed changes to the regulatory environment for Singapore-listed REITs may make the job of REIT-management a less lucrative one, thus dampening the future profitability of ARA Asset Management.

But that said, ARA Asset Management’s track record thus far would still qualify it as a quality share that could be worth a deeper look by investors.

For more investing analyses and important updates about the stock market, sign up to The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you 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 writer Chong Ser Jing doesn't own shares in any companies mentioned.