ARA - Half Year Review

Quick review
ARA surprised on the upside because some risks I highlighted didn't materialize and certain development(s) were more positive than expected and certain development(s) were not captured even though it should have been.

Things that Were Not Expected
1) AUM
I was concerned that there could be downward revaluation when year-end came. There wasn’t. So base fee was not going to drop as I was afraid of. Good.

Moreover, ARA managed to increase the AUM for private funds. Totally not expected.

2) Real Estate Management Arm
I screwed up here. I forgot to take this into account when doing the analysis. Because it was not captured in the 3Q09 results, doesn't mean it will not be in captured in the 1Q10. It was publicized. It was in press releases. I should have read those a bit more thoroughly. And if I did, I would have realize how earning accretive this move will be. Luckily, this was a surprise on the upside – S$2.9m in 1Q10. If it was a surprise on the downside, I would be slapping myself silly. SERIOUS BLINDSPOT. READ THE NEWS ABIT CLOSER.

3) Other income/ Gain on disposal of REITs units
I was aware of this. And I highlighted that this will help pull earnings up. But what I didn't realize is that this could potentially be a key swing factor on the earnings. Mainly because this is pure profit. There is no cost base for this. So it feeds straight down to the bottom line. WOW. Expect this to persist as the prices of REITs have strengthened. But note that this is a double-edged sword even markets turn.

4) Bottoming of rents
Expect to bottom sometime in 2011. But according to DTZ, has already bottom in 2Q10. Exceed expectation.

So performance fees may not drop as much as expected.

Things Expected
1) Cache Logistics
That was spot on. The key catalyst for re-rating.

2) Increase in market cap and thus attract greater institutional interest
Didn't write that down previously. But was a key secondary hypothesis I was waiting to verify. This particular experiment on ARA seem to provide a positive response.

3) Bottoming of Capital Values
Spot on.

4) Increased investment activity in ADF private fund.
As expected, ARA is trying to invest a major portion of the fund by this year, to hit the 75% target that will release them from the clause which prevents them from raising a new fund.

Conclusion
Despite the MAJOR blindspot, I got a few of the major points right (Cache Logistic, office market turning). That was important. Important to be right on the critical points. Makes you money even if you were wrong on the minor points.

However, I was overly conservative on some points (e.g. AUM revaluation) and was off on the timing (e.g. rental bottoming). Which is good because my BUY analysis of ARA is not based on the most optimistic outlook and therefore somewhat prudent. But is bad because being overly conservative makes you lose out by not buying more – mistake of omission. Not clear if it is possible to improve significantly on this because of the risk/return trade-off.

As a result, the above factors led me to underestimate profit growth. So instead of a growth of 8 – 15%. I now expect a higher growth rate because the negative pressures have reduced and the positives have exceeded expectations. It is probably somewhere closer to 15 – 25%.

C&O

Dear Readers

I recommend you all to take a closer look at C&O. I believe that this may be a profitable venture for those who pay attention. The signal of unusual activity, in my opinion, is the high dividend payout YTD.

I may write more when I have the time and effort to. In the meantime, go mull over it :)