ARA Asset Management

[roxhockey]

I am a big fan of this company from an operating standpoint but $3 fair value looks very high to me. At the moment market cap is ~S$1.5bn which includes say ~$40m net cash and ~$250m of REIT holdings implying you are paying around $1.2bn for the funds management business. This works out to about 20x PE at current share price, which seems pretty fair considering
a) underlying growth is driven by AUM growth, and ex-acqusitions growing AUM by 10% a year would seem like a pretty good outcome
b) we're running the risk of a property correction/crash which would have a relatively small immediate impact on ARA but dent sentiment towards the asset class, making future fund raising more difficult

Q1 results were released a while ago - the administrative expense number looked surprisingly high, but some of this is probably related to the material performance fees realised in Q413 and should hopefully normalise back down to around the $10m/qtr level for the remainder of the year. The rest of the result didn't seem too surprising to me, any thoughts from other holders here?

A big headwind for growing NPAT in FY14 will be the material $15m of acquisition/performance/advisory fees earned in FY13. If there's not similar 'windfall' fees in FY14 then headline NPAT will probably be flat to down even if AUM continues to grow.

(vested)

[Boon]

I am a big fan of this company from an operating standpoint but $3 fair value looks very high to me. At the moment market cap is ~S$1.5bn which includes say ~$40m net cash and ~$250m of REIT holdings implying you are paying around $1.2bn for the funds management business. This works out to about 20x PE at current share price, which seems pretty fair considering
a) underlying growth is driven by AUM growth, and ex-acqusitions growing AUM by 10% a year would seem like a pretty good outcome
b) we're running the risk of a property correction/crash which would have a relatively small immediate impact on ARA but dent sentiment towards the asset class, making future fund raising more difficult

Q1 results were released a while ago - the administrative expense number looked surprisingly high, but some of this is probably related to the material performance fees realised in Q413 and should hopefully normalise back down to around the $10m/qtr level for the remainder of the year. The rest of the result didn't seem too surprising to me, any thoughts from other holders here?

A big headwind for growing NPAT in FY14 will be the material $15m of acquisition/performance/advisory fees earned in FY13. If there's not similar 'windfall' fees in FY14 then headline NPAT will probably be flat to down even if AUM continues to grow.

(vested)

1) Agreed - SGD 3.00 fair value seems high – PE of 20 sounds more reasonable to me.
2) What I like about ARA is its business model is highly scalable – Both AUM under Reits and Private Funds has been growing YoY over the past 10 years. .
3) Recurring Management Fees (RMF) - the No:1 revenue stream – has been growing in tandem with growth in AUM over the years– if AUM is growing, this revenue stream should grow accordingly.
4) Acquisition, divestment and performance fees (ADPF) – the No: 2 revenue stream - are non-recurring one-off fees which are occurring on a less regular basis –and whose quantum could fluctuate up and down more significantly YoY – (FY2013= 14.6 million) ; (FY2012 = 8.2 million) ; (FY2011 = 21.2 million) ; (FY2010 = 17.5 million).
5) Due to the irregular nature of ADPF, I would not be worrying too much on it even if it could potentially drag the headline NPAT in a particular year down as you have said.
6) I am less concern on the risks resulting from a potential property crash or correction – I think it would offer better opportunities for both Reits and Private Funds under the ARA flagship to acquire assets at bargain values – from a contrarian and opportunistic perspective – this could be the best time to raise more funds to seize the opportunities of buying “low”.
7) IMO, the ability of a GP (or Fund Manager) to raise funds is driven more by his/her ability and track record in delivering and meeting target returns expected of him/her by investors – If a fund Manager is good, ability to raise fund at any point in time of a business or property cycle should not be an issue – most Private RE Funds nowadays have a long enough tenure or fund life to ride through a property cycle.
8) The track record of ARA as Fund Manager (GP) of Private RE funds has been short, other than Calpers, I think many of the LPs are first time investors with ARA. If ARA fails to deliver or meet target returns of these funds, it would be highly unlikely that these investors would park their money with ARA again – this has been my bigger concern – a more distant concern I should say as most of these funds are at the early stage of their fund lifes.
9) Even though ARA is a publicly listed asset management company, little has been disclosed on how well these Private funds under its management have been doing – probably due the “Private” nature of the funds. ADF I seems to be doing well – that probably explains why Calpers has been putting more money with ARA again.
10) Your concern on cost escalation – administrative expenses – is a legitimate one – and one should monitor closely on this.
11) In short, if AUM could grow on average at not less than 10% annually, and costs could be contained accordingly in line with growth – I would not be worrying too much.

(vested)

[EnSabahNur]

11) In short, if AUM could grow on average at not less than 10% annually, and costs could be contained accordingly in line with growth – I would not be worrying too much.

(vested)

I agree with your points, but with AUM at an estimated SGD 25 to 26 Billion, 10% a year is equivalent to 2.5 Billion. That would be roughly the same as raising 2 ADF funds each year. Not impossible, but increasingly difficult as size grows.

[Nick]

I divested my stake in ARA recently based on similar concerns. I felt there is no true economies of scale in the private fund business and that is the direction ARA is heading to. This is due to the fact that each fund requires its own management team (a major cost) and funds cannot own the same building (unlike equity fund owning similar stocks) so each management needs an independent research team. Moreover, they seem to be launching many small size funds (the recent development fund was only $80 million in capital) so I suspect operating margins won't be as a great due to the high operating cost and low revenue from a small AUM. I would prefer a few small but large funds and funds being open ended enabling newer investors to contribute capital to fund expansion. I suspect that describes a REIT instead haha ! Unfortunately, they haven't launched one in years - I suspect in recent times, the barrier of entry towards reit management is very low though the moat for incumbents is pretty high. Let's wait and see. It is still a great business to own - I just question the ability to grow while maintaining the fat margins. Just my 5 cents.

(Vested in odd lots)

[EnSabahNur]

I would prefer a few small but large funds and funds being open ended enabling newer investors to contribute capital to fund expansion. I suspect that describes a REIT instead haha !

(Vested in odd lots)

Good point but due to the illiquid nature of property, open ended funds are not possible. On the flipside, property funds lock up the AUM for 7 to 10 years. Which gives you some predictability.

REITs are the best of both worlds. Once new units are created, they are hardly redeemable, I think. Like Hotel California.

[roxhockey]

Good point Nick, the REIT business is certainly more favourable than the private fund business. You have a near perpetual pool of capital and it seems pretty impossible for you to be unseated as a manager. That's one of the reasons I'm generally pretty adverse to buying REITs!

Asset inflation does provide a tailwind to AUM growth - if inflation is 3-4% p.a. across the portfolio and cap rates remain stable that's another $1bn of assets a year. Expansion into new markets across Asia eg Korea might also help. But I do take the point that $2bn a year, year after year, will be pretty tough to accomplish ex-acquisition so at c20x PE for the operating business I feel it's more fairly valued than undervalued.

[gutman]

I divested my stake in ARA recently based on similar concerns. I felt there is no true economies of scale in the private fund business and that is the direction ARA is heading to. This is due to the fact that each fund requires its own management team (a major cost) and funds cannot own the same building (unlike equity fund owning similar stocks) so each management needs an independent research team. Moreover, they seem to be launching many small size funds (the recent development fund was only $80 million in capital) so I suspect operating margins won't be as a great due to the high operating cost and low revenue from a small AUM. I would prefer a few small but large funds and funds being open ended enabling newer investors to contribute capital to fund expansion. I suspect that describes a REIT instead haha ! Unfortunately, they haven't launched one in years - I suspect in recent times, the barrier of entry towards reit management is very low though the moat for incumbents is pretty high. Let's wait and see. It is still a great business to own - I just question the ability to grow while maintaining the fat margins. Just my 5 cents.

(Vested in odd lots)

If I am no mistaken, the 80 mil announced is not the fund, but the seed capital from Straits Real Estate. If this forms 10% of the total fund that they are looking at, then we could be looking at a fund size of 800 mil.

[Boon]

I divested my stake in ARA recently based on similar concerns. I felt there is no true economies of scale in the private fund business and that is the direction ARA is heading to. This is due to the fact that each fund requires its own management team (a major cost) and funds cannot own the same building (unlike equity fund owning similar stocks) so each management needs an independent research team. Moreover, they seem to be launching many small size funds (the recent development fund was only $80 million in capital) so I suspect operating margins won't be as a great due to the high operating cost and low revenue from a small AUM. I would prefer a few small but large funds and funds being open ended enabling newer investors to contribute capital to fund expansion. I suspect that describes a REIT instead haha ! Unfortunately, they haven't launched one in years - I suspect in recent times, the barrier of entry towards reit management is very low though the moat for incumbents is pretty high. Let's wait and see. It is still a great business to own - I just question the ability to grow while maintaining the fat margins. Just my 5 cents.

(Vested in odd lots)

If I am no mistaken, the 80 mil announced is not the fund, but the seed capital from Straits Real Estate. If this forms 10% of the total fund that they are looking at, then we could be looking at a fund size of 800 mil.

I think "gutman" is right - the USD 80 million under SDF I was just the first initiative and form part of a bigger plan to grow SDF series into a SGD 10 billion private funds.

http://www.ara-asia.com/news/28Oct2013-P...liance.pdf
http://www.ara-asia.com/news/8May2014%20...se-SDF.PDF

(vested)

[Muser]

Why buy
- asset light, low leverage, fee-based income, multiple income streams
- owners & mgmt with good track record (john lim, li ka shing group, straits trading)
- good track record in growing revenes & profits
- consistently high ROE
- significant share holding by CEO and strategic owners (straits trading, li ka shing group)
- sidecar investment (ability to gain access to real estate investments which others may not be able to, due to track record & relationships)
- selling at >40% discount to EPV (my calculation may be wrong)

What can go wrong?
- my bias. I like the company
- increase in debt
- change from asset-light model to asset-heavy model (like higher ownership/stake in assets managed)

Catalyst to sell
- when valuation gap closes (my EPV estimate is ~$3)

This $3 is based on a simple valuation method inspired by this wonderful book http://goo.gl/7ntp7t ....and conservative assumptions..simple workout.

[specuvestor]

Why buy
- owners & mgmt with good track record (john lim, li ka shing group, straits trading)
- significant share holding by CEO and strategic owners (straits trading, li ka shing group)

What is your view on John Lim & LKS selling to Straits trading?