Slowing development starts
- 1Q16 results in line with our estimates but below consensus.
- Slower development starts in FY16 in China; medium term outlook intact.
- Maintain BUY, TP revised to S$3.00.
Highlights
1Q16 results in line with our estimates but below consensus.
- GLP reported a 49% rise in PATMI on top of a 65% rise in EBIT to US$268m and US$450m respectively.
- The better performance was on the back of higher asset values, development gains and higher fee income (+16% to US$36m).
- Stripping out revaluation gains, earnings would have dipped 7% to US$57m. GLP’s capital structure remains conservative with gearing ratio of 21%, with 75% of its debt fixed at an average weighted interest cost of 2.8%.
- Looking ahead, with expectations of the closing of the acquisition of the US logistics portfolio for US$4.55bn, gearing is expected to rise to c. 30% before settling down towards current levels after GLP reduces its stake in Apr-16.
Operational performance remains steady.
- GLP recorded 12m sqft of new and expansion leases for the quarter (+ 48% y-oy) with tenant retention high at 70%.
- Average occupancy were 92% (China : slight dip to 88%, but expected to creep back up to 90% in FY16; Japan: stable at 98%, Brazil: slight dip to 94% and USA: stable at 92%).
- Rental reversions remained healthy across its main markets. (China: +7.3%, Japan: +5.5%, Brazil: +6.2%, USA: +20.8%).
Outlook
Cut in development starts for 2016.
- The group is revising down its development starts for 2016 in China, to US$1.7bn (vs US$2.2bn previously). This is mainly due to slowing demand seen in selective regions that it operates in (Tianjin and Dalian).
- Management expects this slowdown to be temporary and remains optimistic on the outlook in the medium term given strong indications from major tenants (mainly e-commerce players) looking to further expand.
- Despite management’s near term cautiousness, development starts amount to US$3.4bn in 2016, which is 30% higher y-o-y.
- Management maintains its medium term robust growth outlook and expects US$8bn in development completions over the next 3 years, of which GLP’s share is expected to be US$3.6bn or 45% of the total.
- A majority of these developments are expected to be funded through the newly set up China Logistics Fund 2 (CLF2).
AUM of Fund Management platform rose to S$27bn.
- Management fees rose 50% to US$150m in FY15 and is expected to continue rising ahead.
- As of Jun-15, total AUM rose to US$27bn, of which the group has another US$10bn of uncalled capital to be deployed.
- Given the scaleable nature and high recurring cashflows from this business, we expect this platform to continue growing through new funds.
Paring down in stake in US logistics business.
- GLP recently announced an acquisition of a US$4.55bn portfolio in the US. Management is in advanced discussions with third party capital partners who are keen to co-invest alongside GLP.
- The medium term target to divest 10% by Apr-16 remains intact.
Valuation:
- We maintain our BUY call, but cut our target price to S$3.00 (prev S$3.17) based on a wider 20% discount to RNAV given guidance of slowing growth outlook in China.
Key Risks:
Slowdown in Chinese economy.
- If a slowdown in the Chinese economy leads to a reduced appetite for logistics warehouse space, there could be slower-than-projected revenue growth.
Foreign currency risks.
- Exposure to various currencies (CNY, JPY, BRL) could lead to volatility in the group's USD earnings.
Analyst: Derek TAN; Rachael TAN
Source: http://www.dbsvickers.com/
