9 Reasons Why ARA Asset Management Limited Can Continue Being a Winning Investment

ARA Asset Management Limited (SGX: D1R) has been a solid winning investment with its shares up by 103% to S$1.75 since it got listed on November 2007.

Achieving a double over eight years might not seem very remarkable as that represents an annual return of “only” 10%. But, it’s an impressive return if we actually consider that Singapore’s market barometer, the Straits Times Index (SGX: ^STI), has lost nearly 7% of its value over the same time period.

This raises the question: Can ARA Asset Management continue its winning streak? It’s not an easy question to answer. But some clues can be found in the quality of the firm’s business given the idea that it’s the performance of a share’s business which drives its price over the long-term.

A quality list

A check-list that’s designed by investor and author Pat Dorsey can be a useful tool to help us gauge the quality of a business.

The checklist, which can be found in Dorsey’s book The Five Rules for Successful Stock Investing, is meant to help investors sift out companies which are worthy of a deeper look. There’re nine criteria in the checklist and they are as follows:

  1. The firm provides regular financial updates, has a long track record as a publicly-listed entity, and has 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 generate lots of free cash flow.
  8. There are infrequent appearances of one-time charges.
  9. There has not been major dilution of shareholders’ stakes in the firm.

Companies which score a “yes” in all or most of the criteria will likely have a quality business. If you’d like a deeper look as to why these criteria make sense in the context of finding a solid business, you can check out my colleague Chin Hui Leong’s three-part series on the subject: Part 1, Part 2, and Part 3.

Ticking the right boxes

As a quick introduction, ARA Asset Management earns its keep from managing real estate investment trusts as well as private real estate funds. Some of the REITs in Singapore which are managed by ARA Asset Management include Suntec Real Estate Investment Trust (SGX: T82U) and Cache Logistics Trust (SGX: K2LU).

With that, let’s see how the company has fared against Dorsey’s checklist.

The firm has been listed for nearly eight years; it has quarterly earnings releases; and it has a noteworthy market capitalisation of S$1.49 billion. These traits will see ARA Asset Management tick the “yes” box for Dorsey’s first criterion.

Chart 1, ARA Asset Management's operating income, operating cashflow, free cashflow, and net income

Source: S&P Capital IQ

Chart 1 above plots the history of ARA Asset Management’s operating income, net income, operating cash flow, and free cash flow. As you can probably tell, all four of the important financial metrics have been growing steadily since 2008. We can tick the right boxes for criteria 2, 3, 5, and 7 in Dorsey’s checklist as a result.

Chart 2, ARA Asset Management's return on equity (ROE), total cash, and total borrowings

Source: S&P Capital IQ

Moving onto Chart 2, we can observe that ARA Asset Management has generated a phenomenal return on equity of at least 29% over the past six years from 2008 to 2014. In addition, the firm has been able to do so with a very strong balance sheet that has consistently had more cash than debt.

Leverage is often used by companies to increase their returns on equity but as Chart 2 shows, ARA Asset Management has not required the use of much debt to generate its solid returns on equity. With that, the firm has aced both criteria 4 and 6.

We’re now at the penultimate criterion on Dorsey’s checklist and this is also where the company shines: There has hardly been any significant one-time charges for the time frame under study.

Chart 3, ARA Asset Management's share count

Source: S&P Capital IQ

Chart 3 shows us how ARA Asset Management’s share count has evolved over the past six years and given how the number of shares outstanding has hardly budged, it’s fair to say that the firm hasn’t been diluting its shareholders.

A Fool’s take: 9 points for a winner

When we round up the scores, we can see that ARA Asset Management has aced all nine of Dorsey’s criteria. That can be taken as a sign that the firm has a quality business and can thus continue its winning streak.

But, it’s worth noting that Dorsey’s checklist is meant to help narrow the field and isn’t meant for picking investments. In other words, more work needs to be done beyond this before any investing decision can be made.

The strength of a company’s business is just one important piece of a puzzle made up of other important pieces. There are many other crucial factors to consider too, such as ARA Asset Management’s future prospects and valuation.

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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.