ARA Asset Management Ltd - Catalysts in sight (CIMB)

OUTPERFORM Maintained

S$1.40 Target: S$1.82

Mkt.Cap: S$1,076m/US$880m

Property Investment

• Catalysts in sight. At 22% of our FY11 estimate (1H11: 44%), the 2Q11 net profit of S$14.7m was slightly below consensus and our expectations. The variance came mainly from the weakening of the USD against the SGD although we also expect a stronger 2H11 with backloaded fees from Hui Xian REIT and the closing of ADF II. Factoring in later contributions from ADF II and a weaker USD, we lower our FY11-13 profit estimates by 4-7%. Our SOP-based target price dips from the previous exbonus S$1.89 to S$1.82. We believe the recent share price pullback provides a good entry point. ARA remains an OUTPERFORM with near-term catalysts from the successful securing of key investors and closing for ADF II. Mid-term catalysts could come from special dividends from performance fees from ADF I and roles to manage future HK Rmb equity offerings.

• Hurt by the USD. 2Q11 net profit grew 17% yoy on a 22% increase in recurrent REIT management fees, offset partially by weaker portfolio management and service fees and lower real estate management services fees. Results were dragged down by a weaker USD and management fees growth would have been a stronger 9% compared to the current 6% if not for the negative FX impact. Management fees from Hui Xian REIT contributed a maiden S$0.6m during the quarter. Management declared an interim dividend per share of 2.3 S cts (unchanged from 1H10 despite a 1-for-10 bonus issue) and will seek to maintain last year’s dividend per share of 4.8 S cts for the full year.

• On track for closing of ADF II. Despite a difficult fund-raising environment given the current market uncertainty, ARA successfully achieved a first closing in Jul with firm commitments of US$300m. With management in advanced negotiations with new investors and previous investors in ADF I, it remains confident of achieving committed capital of US$1bn by Oct and should start investing by 4Q11.

• Look to ADF I further down the road. ADF II’s predecessor, ADF I is, meanwhile, on track to generate returns in excess of its 10% hurdle rate and could produce oneoff performance fees on asset divestments in 2013. With ARA’s share of the performance fees estimated to be north of S$60m, this could translate into a special bumper dividend for investors in 2013.