Straits Trading Company Limited - DBS Research 2021-02-22: Diving Into ARA’s Potential – The Sky Is The Limit


Straits Trading Company Limited - Diving Into ARA’s Potential – The Sky Is The Limit

  • Increase our valuation for ARA to S$5.0bn, from S$3.8bn previously.
  • “Crown Jewel” ARA could be worth up to S$6.4bn in our most bullish case.
  • ARA’s relisting will be a key catalyst for Straits Trading (SGX:S20).
  • Maintain BUY on Straits Trading with a higher target price.

ARA Asset Management – The “Crown Jewel” in Straits Trading’s portfolio.

  • ARA Asset Management is a leading APAC real assets fund manager with a global reach. Since its delisting in 2017, ARA has grown at an astronomical pace and expanded its offering beyond real estate private funds and REITs, and now includes listed and unlisted REITs, private real estate equity and credit funds, and infrastructure funds in its staple of products.
  • As at 30 June 2020, the gross assets under management (AUM) by ARA and its associates amounted to S$110bn across 28 countries. Looking ahead, we believe that the group’s AUM is on a firm growth trajectory.

ARA’s proactive deal sourcing and involvement has allowed it to accelerate its AUM.

  • Since its delisting in 2017, ARA has been proactive in growing its portfolio. It has acquired multiple properties across various sectors and geographies, and has value-added to some of these properties through asset enhancement initiatives.
  • ARA has also formed joint ventures and partnerships to leverage on the expertise and network of its partners. It also plays an active role in managing its investments. Its proactive approach has allowed it to grow its AUM at a CAGR of 37.6%, from S$36bn in 2016 to S$110bn in 1H20.

Strategic acquisitions of its key associates, Kenedix and Cromwell, in 2017 and 2018 respectively.

  • In June 2017, ARA had acquired a 20.94% stake in Kenedix as it expanded its presence in Japan. It later acquired a 19.5% stake in Cromwell Property Group in June 2018. Through its partnerships with Kenedix and Cromwell, ARA aims to accelerate its growth by offering new investment products as well as have access to new capital in Japan, Australia, and Europe.

Taking Cromwell into its own hands.

  • In June 2020, ARA announced an intention to increase its stake in Cromwell to 53%, from 24%. It cited deteriorating operational performance, increased complexity, erratic strategy, and has become increasingly concerned with Cromwell’s overall governance and risk management.
  • This exposed ARA’s investment in Cromwell to unacceptable risks and it intends to acquire a majority stake in order to guide the group back towards growth. As the group’s largest shareholder, we believe that there are ample synergies that can be extracted over time.

Accelerating Kenedix – similarities with ARA’s privatisation.

  • In November 2020, Sumitomo Mitsui Finance and ARA announced a partnership to privatise Kenedix at JPY750 per share. ARA will increase its stake to 30%, from 20.3%, and Sumitomo will hold the remaining 70%. The privatisation would strengthen Kenedix REIT and its private placement fund business, enhance Kenedix’s access to credit and other fundraising channels, and expand its business into new areas such as tokenized real estate securities.
  • We believe that the aim of the privatisation is to accelerate Kenedix’s development, similar to ARA’s privatisation in 2017. With its strategic investors, ARA and Sumitomo Mitsui Finance, the aim is to grow Kenedix’s AUM by leveraging on the networks and expertise of its new shareholders. With Japan being a deep market for real estate opportunities, and with the right partner and product offering to capital partners, we believe Kenedix will be the next accelerator to grow AUM for the ARA.

We estimate ARA’s effective AUM to be ~S$81bn as at June 2020.

  • In 1H20, ARA reported an AUM of S$110bn. This included the total managed AUM of its associates. Based on the AUM of its associates and ARA’s interest in its associates, we estimated ARA’s AUM ex-associates to be S$72.9bn and its effective AUM at S$80.8bn as at 1H20.
  • Our previous estimate of ARA’s listing valuation (see initiation report: Straits Trading Company Limited - DBS Research 2021-02-04: Come Get The Crown Jewel; Initiate Coverage With BUY) was too conservative relative to peers and historical REIT transactions. ARA’s peers are currently trading at 19-20x 1-year Forward EV/EBITDA. Our previous assumption of 18.0x was conservative. On an EV/effective AUM valuation basis, our estimate of S$3.8bn for ARA was too conservative.
  • Assuming ARA’s effective AUM grows at a CAGR of 18% from S$80.8bn to S$103.6bn in 2021, our estimate of a listing valuation of S$3.8bn implies an EV/effective AUM of 3.8%, which is significantly below its peers who are currently trading at ~7-22% EV/AUM.
  • In addition, a quick look at previous real estate manager transactions in Singapore unveiled that equity value/AUM multiples range between 4.1% to 7.1%, implying that fair market values for ARA could be closer to those levels.

Revise ARA’s valuation to S$5.0bn, from S$3.8bn.

  • As our previous estimate was too conservative, we are raising our estimated valuation of ARA to S$5.0bn, from S$3.8bn. Our new valuation is based on a 5.0% EV/Effective AUM valuation metric, with an effective AUM of S$104bn in FY2021F.
  • This target AUM implies a CAGR of 18.2% and we believe that this is achievable as
    1. we estimate that it managed to grow its effective AUM at a CAGR of 32.8% from its delisting in 2017 to 1H20, and
    2. the improving COVID-19 situation will allow for increased deal flow.

Based on our sensitivity analysis, ARA could be priced at S$6.4bn in our most bullish case.

  • We conducted a sensitivity analysis on ARA’s potential valuation using two valuation metrics: EV/AUM and EV/EBITDA. Even in our most bearish case, ARA is priced at S$3.7bn, and we arrive at a target price of S$3.46 for Straits Trading.
  • In our most bullish case, we obtained a S$6.4bn valuation for ARA using 22% CAGR on its AUM, representing an effective AUM of S$109.1bn, and 6.0% EV/AUM valuation. This translates to a fair value of S$4.33 for Straits Trading.
  • We think that the bullish valuation is possible given it was delisted at 6.0% EV/AUM and that its effective AUM has grown at a CAGR of 32.7% since its delisting in 2017.

Maintain BUY with a higher target price of S$3.90; Re-iterate Straits Trading’s deep value.

Wei Le CHUNG DBS Group Research | Derek TAN DBS Research | 2021-02-22
SGX Stock Analyst Report BUY MAINTAIN BUY 3.900 UP 3.500