ARA Asset Management - DBS Research 2016-10-27: Hitting the Jackpot

ARA Asset Management - DBS Vickers 2016-10-27: Hitting the Jackpot ARA ASSET MANAGEMENT LIMITED D1R.SI

ARA Asset Management - Hitting the Jackpot

  • Establishing Harmony Fund VI and investing S$4.1bn in project in downtown Shanghai.
  • Deal is a testament of the group’s access and ability to work with major capital partners.
  • BUY maintained, TP S$1.76.


Positioned to grow, BUY. 

  • We maintain our BUY call and TP of S$1.76 on ARA Asset Management (ARA)
  • The closure of a new fund - Harmony Fund VI - in our view exceeds its original assets under management (AUM) target of S$2bn per annum. 
  • We believe the stock is attractive at 15x FY17E PE, at the lower end of historical range, and implied EV/AUM multiple of 4.2x, below -1SD of its historical range.


Executing as planned, acquiring Century Link for S$4.1bn. 

  • ARA announced the establishment of ARA Harmony VI. The fund will invest RMB20bn (S$4.1bn) in Century Link, a newly completed premium-grade integrated commercial property in Lujiazui Finance and Trade Zone in Pudong New District, Shanghai, China. The fund will have a life of ten years and will be anchored by an established insurer, who will be co-investing alongside Peninsula investment Partners (PIP), and Peninsula Co-Investment Holdings I. 
  • We see this as a positive catalyst for the stock as it 
    1. underscores the ability for the group to execute on deals with significant scale and has good access to capital partners, 
    2. improves earnings visibility given the stickiness of capital with the group. 
  • Given that Century Link has been recently completed, we estimate that ARA is able to earn up to S$12.3m in recurring fees as the asset’s performance stabilises in the medium term.


Country desk strategy in target markets of China, South Korea and Australia. 

  • We are positive about the group’s focus on establishing a “Country Desk Strategy“. 
  • Apart from deepening its local expertise and gaining access to deals, we believe that this strategy gives them the ability to cement relationships with brokers, corporates and capital partners. 
  • In addition, we believe that ARA stands ready to capture demand from onshore investors looking to invest outside of their home country.

Valuation

  • Our target price of S$1.76 is derived from sum-of-the-parts valuation (SOTP) which is based on 
    1. market price of the group stakes in its REITs, 
    2. market value of its stakes in the unlisted property funds and 
    3. 18x PE multiple on its recurring income base.

Key Risks to Our View

  • Execution risk. Given pre-determined timeframes for most of its private funds, assuming a prolonged downturn, ARA’s funds could be divesting in a down-cycle.




Derek TAN DBS Vickers | Rachel TAN DBS Vickers | http://www.dbsvickers.com/ 2016-10-27
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.76 Same 1.760



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