Already a majestic name on the Singapore Exchange (SGX), legacy trading firm Straits Trading is set to boost its regal splendour as its “crown jewel” ARA Asset Management prepares for relisting in 2021/2022. With the real estate fund management business potentially worth $6.4 billion in the best case scenario, the relisting is set to be a key catalyst for Straits Trading as ARA goes public once again.
“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,” says Chung Wei Le and Derek Tan of DBS Group Research.
Based on historical REIT manager transactions, the DBS duo expect ARA to be valued at $5 billion at 5% EV/AUM, up from an initial estimate of $3.8 billion. Their most bullish estimates, however, sees the leading APAC real assets fund manager valued at $6.4 billion. ARA Asset Management currently has $110 billion gross assets under management (AUM) in 28 countries as of 1H2020, up from just $36 billion in 2016.
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“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 $3.7 billion,” Chung and Tan explain. The bull case of $6.4 billion is possible, they argue, since it was delisted at 6.0% EV/AUM in 2017 and its effective AUM has since grown at a compound annual growth rate (CAGR) of 32.7%.
ARA’s strong AUM stems from proactive deal sourcing and involvement. Management has been proactive in driving portfolio growth, acquiring multiple properties across sectors and geographies and providing value-add to some by way of asset enhancement initiatives. It has also formed joint ventures and partnerships to tap on the expertise and networks of its partners while also taking an active role in managing its investments.
For instance, ARA made strategic acquisitions in key associates Kenedix and Cromwell in 2017 and 2018 respectively. Through its partnerships with these firms, ARA hoped to accelerate growth by providing new investment products while improving new capital access in Japan, Australia and Europe. ARA has a 20.94% stake in the former and 19.5% stake in the latter.
And ARA is looking to play an even more active role in the management of these associates. It announced its intention in June 2020 to up its stake in Cromwell to 53% to guide the group back towards growth following poor operational performances. In November, it announced a partnership with Sumitomo Mitsui Finance to privatise Kenedix at JPY750 ($9.37) a share to enhance its credit access and expand into new areas like tokenised real estate securities.
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“We believe that the aim of the privatisation is to accelerate Kenedix’s development, similar to ARA’s privatisation in 2017,” note the DBS analysts. ARA’s aim, they say, is to grow Kenedix’s AUM by leveraging on the networks and expertise of its new shareholders to tap into Japan’s deep market for real estate opportunities. Kenedix, they argue, could be ARA’s new AUM accelerator.
All these exciting developments are available at attractive valuations, with Straits Trading currently trading at just 0.7 times P/NAV and an even steeper discount to its realisable value. The analysts have thus maintained a “buy” call on Straits Trading with a higher $3.90 target price from $3.50 previously. “We are the only brokerage covering this stock and we see deep value in its investments,” write Chung and Tan.
Still, the pair cite revaluation loss on properties as a key downside for Straits Trading. Disruption to Malaysian Smelting Corporation and Far East Hospitality Holdings, could also negatively affect Straits Trading’s performance.
As of 4.46pm, Straits Trading is currently trading 1.78% lower at $2.76. P/E ratio is currently 23.65 and dividend yield stands at 2.17%.
