ARA Asset Management - DBS Research 2016-06-13: Making the next quantum leap

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ARA ASSET MANAGEMENT LIMITED D1R.SI 

ARA Asset Management - Making the next quantum leap

• Country desk localisation strategy to reap dividends for the group in the medium term.
• Managed REITs have close to S$5bn of debt- funded headroom.
• Attractive valuations, BUY, TP raised to S$1.76.

Positioned to grow, BUY! 

• Flushed with proceeds from the recent rights issue, ARA is well positioned to capture AUM through the launch of new fund products with capital partners. 
• With the expected growth in investments through its stakes in private funds, we have adjusted our SOTP to account for that. We maintain our BUY call but raise our TP to S$1.76 based on 
  1. 18x PE on its FY16F recurring fee income; and 
  2. market price of its REITs and committed capital on its private funds. 
• Current price implies an Enterprise Value/Assets under management (AUM) multiple of 4.8%, near -1SD of its historical range.

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 the ability to cement relationships with brokers, corporates and capital partners (hanging sentence). 
• In addition, we believe that ARA stands ready to capture demand from onshore investors looking to invest outside of their home country. With offices across key markets in Asia, we think ARA stands to capture some of this demand.

ARA has a suite of products to meet changing investors’ preference. 

• We understand that demands from capital partners have changed over time but ARA has a strong suite of products which can attract capital. 
• We expect ARA to grow AUM by S$2bn per annum. In addition, its staple of REITs under management has more than S$5bn in acquisition capacity which can be utilised to acquire and grow its AUM.

Valuation:

• We maintain our BUY call but raise our TP to S$1.76 based on 
  1. 18x PE on its FY16F recurring fee income; and 
  2. market price of its REITs and capital committed to its private funds.

Key Risks to Our View:

Execution risk. 

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

Sensitivity study. 

• We leverage our ARA interactive model to consider the impact of a few scenarios – No AUM growth and devaluation of REIT income. Impact is not more than 5% which implies that its earnings stream is stick.

Derek Tan DBS Vickers | Rachel Lih Rui Tan DBS Vickers | http://www.dbsvickers.com/ 2016-06-13

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.76 Up 1.57