Global Logistic Properties (GLP SP) - UOB Kay Hian 2017-02-10: 3QFY17 Jury Still Out On Strategic Review


  • Global Logistic Properties (GLP SP) - UOB Kay Hian 2017-02-10: 3QFY17 Jury Still Out On Strategic Review GLOBAL LOGISTIC PROP LIMITED MC0.SI

Global Logistic Properties (GLP SP) - 3QFY17 Jury Still Out On Strategic Review

  • Results came in above our and consensus expectations. Management refrained from divulging further details on the ongoing strategic review of its business. 
  • Asset recycling plans in China remain embryonic, with initial talks scheduled with a potential investor. 
  • Maintain HOLD with a higher target price of S$2.50 (from S$2.40), pegged at a 20% discount to an increased RNAV of S$3.12/share (from S$3.06).



RESULTS


Results above our and consensus expectations. 

  • 9MFY17 core PATMI came in at US$214.7m, accounting for 82% of our FY17 estimates (85% of consensus), due to better-than-expected operating profit from the investment portfolio in Japan and the US.
  • 3QFY17 headline PATMI of US$170.7m fell 7% yoy, on the back of higher net finance costs and a one-off syndication gain of US Income Partners 1 last year. This was mitigated by higher revaluation gains and completion/stabilisation of development projects in China, and higher revenue from China financial services and fund management fees. 
  • Stripping out exceptional items, 3QFY17 core PATMI of US$77.8m was up 11% yoy.

No visible timeline on strategic review. 

  • Management refrained from shedding further light on the ongoing strategic review of its business in terms of a tangible timeline. GLP continued to emphasise that there was no assurance that a transaction will materialise.
  • Chinese asset recycling plans are still at a nascent stage, with management stating that it is in initial talks with a potential partner. Meanwhile, the investment portfolio saw 3QYF17 lease ratio remain stable at 87% while retention ratio fell 3ppt qoq to 65% (2QFY17: 68%). 
  • New/renewal leases were up 35% yoy to reach 1.88m sqm (-2%qoq).

Effective rent growth on renewals was up 5.3% (2QFY17: +6.3%). 

  • Cap rates saw an 11bp compression to reach 6.3%. GLP believes China’s mid-long term outlook remains positive, and sees growing demand from the organised retail, auto parts and cold storage sectors.

New financial services business in China. 

  • GLP started extending loans to tenants, particularly those with significant capex requirements for more specialised equipment (ie chillers, automation). 
  • By charging lower interest rates than banks and financial institutions, it intends to profit from the spread between its own borrowing costs and interest rates on loans extended to tenants in China. 
  • The new business’ 3QFY17 operating margins were 11.1%, though management attributed the high operating expenses to higher capital outlay during the ramp-up period. GLP expects meaningful contributions from this segment over the next two years.

Japan still displaying resilience. 

  • Lease ratio dipped 1ppt to 97% while new/renewal leases expanded 57% yoy to 0.22m sqm (-8% qoq), with effective rent growth on renewals of 6.6%. This was driven by ongoing healthy customer demand and limited supply of modern logistics facilities. 
  • Cap rates remained stable at 4.8%. Although lease ratio saw a dip this quarter, management expressed confidence that occupancy would revert to 98% next quarter.

US performance stable, potential for further scaling of footprint. 

  • Lease ratio stayed stable at 94%, as new/renewal leases expanded 41% yoy to 1.0m sqm (+0%qoq), with effective rent growth of 14.4%. Cap rates remained stable at 5.9%.
  • Management highlighted its intent to pursue acquisition of stabilised assets in this market.

Cap rate compression in Brazil by about 29bp in 3QFY17. 

  • Management opined that Brazil could continue to see lower interest rates (single digits), underscoring higher liquidity and further cap rate compression. The Brazil investment portfolio saw stable lease ratio of 89% in the quarter (2QFY17: 89%), though negative rental reversions of 10.3% were registered.

Development targets. 

  • 3QFY17 saw GLP start US$294m and complete US$337m of development projects. GLP has met 56% and 68% of FY17 starts (US$2.1b) and FY17 completions (US$1.5b) targets respectively, while generating a development profit margin of 29%. 
  • While it did not reveal its development targets for FY18 and FY19, management intends to continue a disciplined approach by constructing in markets with lease ratios above 90%.


VALUATION/RECOMMENDATION

  • Maintain HOLD with an increased target price of S$2.50, pegged at a 20% discount to our RNAV of S$3.12/share. 
  • We raised our RNAV estimate by nearly 2%, factoring in cap rate compression of 11bp for China assets, 29bp cap rate compression in Brazil assets and increased fund management contribution of about 5%. 
  • We have also lowered our historical RNAV discount by 2ppt from 22% to 20%, after incorporating more recent data points (narrower trading discount between GLP’s share price and its RNAV).


EARNINGS REVISION 

  • We have increased our FY17 and FY18 earnings estimates by 5% in each year, factoring in higher contributions from Japan and US properties of about 9% in both FY17 and FY18 respectively, after factoring in higher rental income growth assumptions.


SHARE PRICE CATALYSTS 

  • Growth in domestic consumption underpinning logistics demand.
  • Visibility on strategic business review.




Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2017-02-10
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 2.500 Up 2.400





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