DBS Vickers 2015-08-11: ARA Asset Management - 2Q15 results in line; Growth stacking up nicely. Maintain BUY.

ARA ASSET MANAGEMENT LIMITED D1R.SI

Growth stacking up nicely

2Q15 results in line.
Additional US$300m commitments from ARA China Investment Partners and launch of ARA Harmony Fund III.
ADF1 to completely divest properties by end of 2015.
Maintain BUY, TP S$1.87.

ARA reported a 21% dip in 2Q15 PATMI to S$16.4m, resulting in 1H15 PATMI dipping 8% to S$35.4m. The drop in 1H15 PATMI was mainly attributable to one-off negative goodwill of S$2.1m recorded in 1Q14 from the acquisition of ARA Korea Limited. After adjusting for these items, 1Q15 PATMI, excluding one-off items, would have been up 10% y-o-y (2Q15 adjusted PATMI will be 11% higher).

Recurring management fee revenues increased c.1% to S$61.8m on the back of higher fees from its various ARA private funds and REITs which more than offset the dip in fees from Asia Dragon Fund 1, which has entered into its divestment phase since 2012.
The group also recorded higher acquisition fees in 1H15 from Fortune REIT and Cache Logistics Trust which acquired properties in 1H15. The expanded portfolio will go towards higher recurring management fees in 2H15.
ARA has proposed a dividend per share of 2.3 Scts, in line with last year.

ARA has raised commitments for ARA Harmony Fund III which will invest in a portfolio of commercial properties in Malaysia worth MYR1.7bn, acquired from ADF1. ARA Harmony Fund III is expected to have a fund life of five years after which the investors will look to exit their investments.
Straits Real Estate Pte Ltd, a co-investment vehicle established by Straits Trading Company Limited (STC) and Mr. John Lim, founder of ARA, has a 40% stake in this fund. This is a strong indication of support from its strategic partner, STC, of the group’s growth initiatives.
ARA China Investment has also received an additional US$300m in new commitments (2nd reload), bringing total commitments to US$800m. This is expected to contribute to the group’s earnings in 2H15.

With the divestment of the five Malaysian properties to ARA Harmony Fund III, ADF1 has substantially divested most of the assets in the portfolio and is on track to complete the divestment of all its properties by end of 2015.
ARA is entitled to a performance fee, which could be a significant kicker for the stock price. We have not factored in performance fees in our estimates yet.

ARA’s flagship ARA Dragon Fund 3 (ADF3) should kick-start in 2H15, after the deployment of ADF2 is completed. ADF1, which is in the final stages of divestment, is expected to wind down in 2015. The group aims to achieve its AUM growth of S$2bn a year in 2015. This can come from a myriad of opportunities, REIT acquisitions and growing its AUM and/or investing further in new markets in Australia and Korea.
We have pushed back assumptions for ARA ADF3 to close by end of 2016, vs 1H16. Estimates are thus adjusted slightly downwards.

We have a target price of is adjusted to S$1.87 based on
1. 18x PE on its roll-forward FY16F recurring fee income; and
2. market price of its REITs.

ARA's private funds have pre-determined exit timeframes, and ARA may not achieve the best returns for its investors in a weak physical market, thus having a negative impact on its performance fees.

Derek TAN | Rachael TAN | http://www.dbsvickers.com/ DBS Vickers Securities 2015-08-11

BUY Maintain BUY 1.87 Up 1.85