ARA Asset Management: Bang for your buck

- 1Q11 result highlighted strong earnings quality
- Significant boost for ARA's brand name in Asia Pacific from Hui Xian Listing
- Announced 1-for-10 bonus issue. SOTP-based TP raised to S$2.00. BUY!

1Q11 result highlighted strong earnings quality. ARA reported a 19% yoy increase in PATMI to S$14.8m on top of a 14% increase in topline to S$22.1m. The increase was attributable to higher fees from (i) an enlarged REIT AUM post-listing of Cache Logistics Trust in Apr10, completion of Suntec REIT's MBFC acquisition, (ii) acquisition fees from Cache and performance fees from Harmony Fees. EBIT margins were high at 63% and should remain stable.

Significant boost to branding in Asia Pacific, post Hui Xian REIT listing. We raised recurring earnings by 2-5% in FY11F-12F. Of greater significance is the boost to ARA's reputation as a premier manager in the asset management industry as (i) it highlights the strong working relationship with Cheung Kong, which may open doors for ARA to other deals and possible business relationships, (ii) it provides a platform for the group to build on its experience, contacts and branding when it eventually lists its own RMB REIT in Hong Kong or China – a possible strategy that Asia Dragon Fund I (ADF1) could undertake when it divests its properties currently held under the fund in 2012-2013.

Maintain DPS post 1-for-10 bonus. The group announced a 1-for-10 bonus issue, after which dividend per share will be maintained - a strong signal of the group's high quality and sustainable earnings.

Further catalysts abound, TP raised to S$2.00. We believe ARA has built significant leverage, branding and capacity over the years to compete for capital as it launches new funds and REITs. We see re-rating catalysts from the first closing of Asia Dragon Fund II, which is expected to range US500-700m by 1H11 and reach US$1.0bn by end 2011. On the REIT front, ARA is looking at possible acquisitions that will add to its recurring AUM base. We raised our TP pegged to higher 20x PE (18x previously) on its underlying AUM business.

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