Logistics S-REITs - UOB Kay Hian 2021-06-28: Tailwind From E-Commerce & Building Resiliency In Supply Chains

Singapore REITs - UOB Kay Hian Research | SGinvestors.io ARA LOGOS LOGISTICS TRUST (SGX:K2LU) FRASERS LOGISTICS & COMMERCIAL TRUST (SGX:BUOU) MAPLETREE LOGISTICS TRUST (SGX:M44U)

Logistics S-REITs - Tailwind From E-Commerce & Building Resiliency In Supply Chains

  • E-commerce is a key driver of demand as online retail sales require 3x the logistics space compared with brick & mortar retail sales. The transition from just-in-time to just-in-case supply chains is also expected to increase inventories by 5-10%.
  • BUY Frasers Logistics & Commercial Trust (SGX:BUOU) (Target Price: S$1.79) and ARA LOGOS Logistics Trust (Target Price: S$0.89), which provide FY22 distribution yield of 5.6% and 6.2% respectively.



Growth in e-commerce creates demand for more logistics space.

  • Online retailers are heavy-duty users of logistics space. Online retail sales are supported by 3x the logistics space required for brick & mortar retail sales. On average, every US$1b of retail sales creates demand for 1m sf of logistics space.
    1. All inventories are stored in the warehouse, including buffer stocks that are traditionally carried at physical retail stores.
    2. Online retailers offer greater variety of products (stock keeping units).
    3. Online retailers experience greater volatility of sales, which necessitate higher inventory levels. The variability is also exacerbated by promotional activities.
    4. Warehouse space is required for picking, packing and shipping parcels to consumers. Parcel shipping requires more logistics space than pallet shipping.
    5. Online order fulfilment includes value-added services, such as assembly and reverse logistics (returns processing), which requires additional space.

Speedy delivery is core advantage.

  • Millennials and dual-income households expect convenience, choice, reliability and immediacy. Competition between online retailers is intense. Efficient logistics is important as online retailers are under constant pressure to reduce delivery time to meet expectations of demanding consumers. Same-day shipping is also increasingly becoming more popular.

Singapore ideal hub for e-commerce.

  • Singapore is the world’s largest container transshipment hub, while Changi Airport is the largest air cargo hub in Temasek and Google, the e-commerce market in Southeast Asia is projected to expand by CAGR of 12.2% and exceed US$200b by 2025.

Building resiliency creates demand for more logistics space.

  • The US-China trade conflict and COVID-19 pandemic have caused disruptions and exposed the vulnerabilities of lean just-in-time supply chains. Efforts to enhance resiliency will lead to increased demand for logistics space:
    1. Retailers need to hold higher concentration risks.
    2. Multi-national companies have adopted the “China+1” strategy to lead time.


Resilient despite the COVID-19 pandemic.

  • Prime logistics rents increased 0.7% q-o-q to S$1.39psf pm in 1Q21. Occupancy rate improved by 2.3ppt to 89.8% in 1Q21 after hitting a trough of 87.5% in 1Q20. Net absorption was positive for the fourth consecutive quarter at 636,168sf in 1Q21. Prime logistics rents are expected to trend higher due to tight vacancy and strong demand.


Pipeline of new supply has moderated.

  • The logistics market has the next four years (2021-24). The average annual supply is 2.18m sf, which is 51% lower than the 10-year historical average of 4.43m sf.


ARA LOGOS Logistics Trust (SGX:K2LU):



Frasers Logistics & Commercial Trust (SGX:BUOU):



Mapletree Logistics Trust (SGX:M44U):



SECTOR CATALYSTS

  • Growth of e-commerce and online retail sales.
  • Migration from just-in-time to just-in-case supply chains.
  • Relocation of supply chains to Southeast Asia.
  • Moderation in supply of new logistics space.


ASSUMPTION CHANGES

  • We maintain our existing earnings forecast.


RISKS

  • The COVID-19 pandemic has not affected the flow of goods between countries, and thus does not have a negative impact on demand for logistics space.





Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-06-28
SGX Stock Analyst Report BUY MAINTAIN BUY 0.890 SAME 0.890
BUY MAINTAIN BUY 1.79 SAME 1.79
HOLD MAINTAIN HOLD 2.080 SAME 2.080



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