ARA Asset Management Limited (SGX: D1R) held its annual general meeting last Friday. Being a shareholder of the firm, I wanted to learn more and decided to attend the AGM. The event had ran through very smoothly and all who were present also got to enjoy a nice Japanese bento set for lunch at the end of it. While I can’t share the bento set with you now, I can still share some important takeaways about ARA’s business that I had gleaned from the AGM. Here they are:
1. Although ARA’s net profit had grown by 18% in 2014…
ARA Asset Management Limited (SGX: D1R) held its annual general meeting last Friday.
Being a shareholder of the firm, I wanted to learn more and decided to attend the AGM. The event had ran through very smoothly and all who were present also got to enjoy a nice Japanese bento set for lunch at the end of it.
While I can’t share the bento set with you now, I can still share some important takeaways about ARA’s business that I had gleaned from the AGM. Here they are:
1. Although ARA’s net profit had grown by 18% in 2014 to S$87.5 million, a large portion of the growth came from an increase in the fair value of its financial assets. To that point, ARA had recorded a S$9.7 million gain in 2014 due to an increase in the fair value or disposal of financial assets.
If we adjust for those gains, ARA’s operating margin (earnings before interest, tax and associates’ share of results divided by revenue) had actually dipped slightly from 65% in 2013 to 60% in 2014.
But, management’s not too worried about the drop in the operating margin as they explained that this is mainly due to the winding down of the company’s Asia Dragon Fund I. With a lower asset base, the fees and profit have trended down even though the operating cost of running the fund (mainly in the form of staff cost) still has to be maintained.
Management commented that investors should see an improvement again when the company launches the Asia Dragon Fund III in the future.
2. The ongoing restructuring of Cheung Kong Holdings should not have a big impact on ARA (Cheung Kong is a substantial shareholder in ARA with a 7.84% stake as of 13 March 2015). The current plan for Cheung Kong is to spin-off all its property-related businesses, including its interest in ARA, into a new entity known as Cheung Kong Property Holdings Ltd.
3. ARA, which earns its keep mainly from managing publicly-listed real estate investment trusts and private real estate funds, is also hoping for a quick resolution to the changes to the management fee structure for REITs that had been proposed by the Monetary Authority of Singapore.
According to ARA, it is not too worried even if the MAS decides to control management fees in the future. This is because smaller REIT managers would be under a lot more pressure than a larger player like ARA if management fees are placed on a tighter leash in the future. If these smaller competitors then fail or choose to pull out of the business, there might be opportunities for ARA to make attractive acquisitions.
ARA is currently trading at 16.4 times its trailing earnings and carries a dividend yield of just 2.9% (based on its annual dividend of S$0.05 per share in 2014).
The firm still possesses a business with very attractive economics considering that its return on equity in 2014 is 29%. It would appear that ARA can still continue growing its profits in the future so long as it’s able to expand its asset under management. For some perspective, ARA has assets under management (AUM) of S$26.3 billion as at end-2014; at the end of 2007, the selfsame figure was just S$9.7 billion.
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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 Stanley Lim owns shares in ARA Asset Management Limited.