Would Benjamin Graham Buy ARA Asset Management?

ARA Asset Management Limited (SGX: D1R) is an Asian real estate fund manager that finds it shares priced at close to its lowest level for some time.

From highs of as much as S$1.88 last April, the stock has slipped to its present value of S$1.67. The question is whether the decline in the company’s value has left it unfairly under-priced.

Value investors love a company that is unloved by the market. They like it even more if it has been unfairly discounted as a result. Could this be the case for ARA Asset Management?

The company’s earnings yield of 6.2% is roughly treble the risk-free rate of return available on a 10-Year US Treasury bond. This could please a value seeker such as Benjamin Graham. By inference, the company’s shares price would have to rise by around 50% to S$2.60 before it dropped below the value of 4%, which is equivalent to twice the risk free rate.

A look at the bottom-line profits for the last five years suggests there is little to worry about in terms of earnings growth. Despite a brief decline in 2013 the company has been steadily growing its profits at around 3% a year.

The dividend yield of 3% is, likewise, above the risk-free return available. Also encouraging for the shareholders is that the company has been growing its payout, as its profits have risen. On this measure of value, the shares could rise to S$2.25 before it could lose obvious value.

ARA also appears to be in good financial health and sports a current ratio of 1.9, which is very close to the value of two that could seal the deal for a Graham-like value investor. The company has total debts of S$34m. This seems paltry for a company that is capitalised at S$1.4b.

The only measure on which ARA doesn’t look like a screaming value opportunity is its high price-to-book ratio of 4. However this might say more about how the company is operated – it doesn’t need much in the way of assets.

With all other factors seeming to suggest ARA Asset Management is a well-run company, value investors might choose to overlook the high price-to-book and give ARA Asset Management the thumbs up.

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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 Adam Kuo doesn’t own shares in any companies mentioned.