|While slower leasing in China led to the earnings miss in 1Q14, GLP has seen a strong pick-up in the past six weeks. Looking past this, same-store rents in China remain on the rise with a potential recycling of assets in Japan in FY14. 1Q14 core earnings were below, forming 21% of our full-year estimate and 20% of consensus. We lower our FY14-15 core EPS by 3-9% due to slower leasing assumptions for China and lower operating profits in Brazil. Our RNAV-based target price dips to S$3.32 Maintain Outperform, with a stronger China take-up and accretion from asset recycling as catalysts.|
A slower quarter
1Q14 saw a blip in the take-up in China, with new leased area down 57% qoq to 0.2m sq m vs. strong development starts of 0.73m sq m due to a weaker take-up in China. That said, we believe that GLP is unlikely to maintain this current run rate for the rest of FY14. Management indicated that the leasing demand was noticeably stronger in the past six weeks, with c.0.1m sq m leased out in Jul. NAV for China rose by 30% yoy, but would have been stronger if not for some delays asset completions of due to certain reconfigurations made for its customers. Weaker operating profits in Brazil at the associate level rounded off the earnings miss.
Same-store NOI in China rose by 10.4% yoy (rents up 5% yoy), which drove a 40% yoy increase in China revenues. Occupancy in China remains at 90%. Its landbank in China grew by 0.56m sq m and it is on track to add over 2m sq m (19%) to its inventory in FY14. Its balance sheet, at a 9% net debt to asset ratio, remains very robust.
GLP booked a US$100m revaluation gain in Japan on a 13bp cap rate compression (5.2% currently). We believe that further accretion could come if more asset spin-offs into its GLP J-REIT in FY14. Where and what GLP re-invests in will be key for a share price re-rating.