Friday, April 10, 2015

MER reiterates ‘Outperform’ on GLP

Misunderstood; Oversold
GLP is a consensus buy with 18 “Buys” and 2 “Holds”. However, a gap to the street’s fair value has persisted for over a year and the stock has underperformed the STI by 16ppt during this period. MER thinks the underperformance is due to a few misconceptions, which MER clarifies in this report:
  • GLP China stake sale at 1x P/B (vs. MER’s 1.19x target) destroyed value: Intangible benefits not priced in; new investors offer access to ~16m sqm of land bank (~60% of existing modern warehouse space in China).
  • Slowing development starts FY15 YTD: The risk is low, MER thinks. Over the last 3 years, management has met all development starts targets.
  • “Weak” headline profit growth FY15 YTD (-27%YoY): Comparable profits were up 12%YoY. Inevitably, a growing development business (higher proportion of pre-stabilised, inland China properties) slows recurring profit growth in the short run. MER urges investors to focus on the long term.
Modern warehouses in China at least 30% undersupplied
Based on the current development pipeline of 13 major developers/e-commerce players and inferring demand from comparable economies, MER estimates that modern warehouses in China will still be severely undersupplied in 2017 (37m sqm). GLP will continue to extend its market leadership position and capitalise on rising consumption/e-commerce activities.
Scaling up to boost ROE from 7.2% to 11.3% by 2017
GLP’s ROE has declined from 8% in FY14 to ~5% in 2/3QFY15 as proceeds from GLP China stake sale have not been fully invested. Based on MER’s gross development pipeline over the next 3 years (MER: US$7bn vs. Mgmt target: US$8bn), MER sees healthy completions (+15% compounded annual growth rate), which will accelerate recurring and revaluation profit growth (23% & 25%).
Capital recycling into GLP’s fund management platform (high ROE business) provides additional upside. Every US$1bn worth of assets recycled and reinvested at yields 4-9 Scts (1.3%-2.8% uplift to MER’s target price).
Attractive risk/reward proposition
Based on MER’s sum of the parts valuation, MER thinks the market is not pricing in GLP’s stake in GLP J-REIT (S$0.04/sh), the value of the fund management platform (S$0.24) and near term development pipeline (S$0.18).
Trading at 1.19x P/B vs. peer average at 1.39x and with a higher and improving ROE profile, MER thinks the current entry price level is very attractive.

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