Thursday, July 30, 2015

Global Logistic Properties - Planting a bigger footprint in US

What Happened 
GLP announced that it has entered into an agreement to acquire a US$4.55bn US logistics portfolio from Industrial Income Trust at a 5.6% cap rate. This portfolio comprises 58msf of in-fill logistics assets spread across 20 major markets including Los Angeles, Metro D.C. and Pennsylvania. The portfolio has a weighted average lease expiry of 5.5 years and is 93% leased currently to about 600 tenants including notable names such as Amazon, Home Depot, CEVA Logistics and HanesBrands. Based on a 60% LTV, the initial financing structure will comprise US$1.9bn equity and US$2.9bn debt. GLP will initially hold a 100% stake when the deal is completed in Nov 2015 (to be funded with existing cash resources and credit facilities) and intends to pare down its share to 10% by Apr 2016. GLP's share of equity equates to US$190m, based on a 10% stake. 

What We Think
This will be GLP’s second purchase in the US and will expand its US footprint to 173msf, making the group the second largest property owner and operator in the country. Post transaction, the US will account for 6% of GLP's NAV. This purchase is expected to be both earnings- and RNAV-accretive. Apart from its share of rental income from the portfolio, GLP will also be able to grow its fee income base as total AUM will expand to US$33bn. In terms of impact, this purchase, including fee income, could raise net profit by c.US$28m or about 10% of bottomline. Furthermore, the combined portfolio is expected to generate more synergies through economies of scale with minimal additional G&A expenses and upside potential from increasing occupancy and rents in the medium term. 

What You Should Do
We raise our FY17/18 earnings forecasts by 3.9%/3.3% and lift our RNAV estimate to S$3.34 to factor in this transaction. We continue to like GLP for its value creation in China and expansion of its fee income platform, which should enhance ROE in the longer run. We retain our Add call with a higher target price of S$3.34, based on parity with RNAV.

Monday, July 27, 2015

Sheng Siong Group - Upside from gross margins

Tepid same store sales growth 
2Q15 sales expanded 4.3% yoy to S$179m, driven by five new stores (+4%) and same-store sales (+0.3%). Looking ahead, there is cause to be more positive on the growth from the new stores, given that three of the five new stores were only open for about half of 2Q. However, lacklustre local economic conditions coupled with tepid demand post Chinese New Year caused a drag on same store sales growth (SSSG). 2Q15’s flat SSSG (vs. +2.9% in 1Q15) also reflects intensified competition from retailers offering special “SG50” discounts. For example, NTUC FairPrice announced an initiative providing a 10% discount on its range of housebrand products. 

Gross margins continue to trend up
2Q15 gross margin improved to 25.2% (1Q15: 24.4%), driven by lower input costs from its direct purchasing initiatives and efficiency gains derived from its central distribution centre. In addition, we suspect 1) an improvement in sales mix in favour of higher-margin fresh produce (36% GPM vs. 18% for groceries), and 2) a weaker ringgit (40-50% of its grocery is sourced from Malaysian suppliers) also helped. With operating expenses remaining stable (2Q15’s opex as a % of sales was 17.6%, compared with 17.0-17.4% over the past four quarters), improvement in gross margins flowed straight to the group’s bottomline, boosting 2Q15 net margin to 7.6% (1Q15: 7.1%). 

Interim dividend of 1.75 Scts declared (95% payout)
We continue to like the stock’s high payout ratio (consistently >90%), which we think is sustainable given its strong operating cashflows and low capex requirements. The biggest remaining capex is for its Yishun Junction 9 store (S$34m outstanding to be spread across FY15-17). 

Tuesday, July 21, 2015

Global Logistic Properties - Establishing CLF II

What Happened 
GLP announced the setting up of its China Logistics Fund II (CLF II). GLP China will be the manager, and will own a 56% stake with the remaining shares held by seven institutional investors including five from Asia, one from North America and one from the Middle East. CLF II will have committed equity of US$3.7bn and investment capacity of US$7bn. CLF II will develop 13m sq m of GFA in China over the next four years. CLF II will start acquiring land later this year and commence construction in Apr 16. CLF II is GLP's exclusive vehicle for new, wholly-owned logistics development projects in China and does not have a seed portfolio. 

What We Think
This news is not entirely new as GLP had earlier signalled its intention of setting up CLF II, although the US$7bn AUM exceeds the earlier indication of US$6bn due to strong investor interest. We view this move positively as it will expand GLP’s fee income and allow the group to optimise its sources of third party capital as well as boost value creation. As a result of CLF II, total AUM is 36% higher at US$27.1bn. GLP will fund its share of equity with cash (US$1.4bn at end-FY15) and credit facilities. CLF II’s development activities will form part of the group’s targeted development starts growth of 30%, which we have factored into our existing forecast, while the impact of higher fee income on earnings and RNAV should gather pace from FY18 onwards. We reckon that the additional fee income from CLF II could add another 10-13Scts to RNAV when completed, assuming a 15x multiple. 

What You Should Do
We tweak our FY17 and FY18 earnings estimates upwards by 1.4-4.4% to factor in the increased fee income from CLF II. We continue to like GLP for its leadership position in the modern logistics warehouse sector in China, and the accelerated growth momentum of its development activities and fund management business. These activities should move the group closer to its medium-term ROE target of 12%.We retain our Add rating and maintain our existing RNAV and target price (parity to RNAV) at S$3.31.

Wednesday, July 08, 2015

Singapore Post Ltd - Overhang removed with JV

What Happened 
SPOST has entered into a conditional JV agreement with Alibaba, using SPOST’s wholly-owned subsidiary, Quantium Solutions (QS) as the vehicle for the JV. Alibaba will pay S$91.7m for a 34% stake in QS, while SPOST will retain the remaining 66% stake. SPOST also plans to issue 107.6m new ordinary shares at S$1.74/share (7.89% discount to the VWAP of S$1.889 on 7 Jul) to Alibaba, which will increase Alibaba’s stake in SPOST from 10.23% to 14.51% post-issuance. The net proceeds of S$183.6m will be used for expansion in e-commerce logistics (75%) and for general working capital (25%). 

What We Think
At S$91.7m, we estimate that Alibaba will pay 28x P/E for the 34% stake in QS. We view this positively as it establishes a floor for SPOST’s valuation. However, losing a 34% stake in its e-commerce logistics engine (QS) will likely lead to mild earnings dilution in the near term, and we cut our FY16 core net profit growth forecast to -2% (+5% previously). That said, the earnings shortfall can be mitigated with M&As using the S$229m proceeds (net of working capital). While we view the JV as a positive, we do not expect immediate volume growth as the biggest volumes are still in transhipments into/out of China, which SPOST already engages in. Within ASEAN, Indonesia is likely to be the key growth market, but infrastructure issues are likely to plague e-commerce growth in the near term. We are more positive on the medium-term impact, when SPOST capitalises on Alibaba’s volumes as they expand across Asia Pacific, which will lower the cost per parcel in a winner-takes-all market. 

What You Should Do
Upgrade to Add. Upon announcement of the JV, we believe that the biggest uncertainty on the stock has been removed. Though earnings growth may only accelerate in the medium term, investors are paid to wait with a 3.7% yield. 

Monday, July 06, 2015

Perennial Real Estate Holdings - Diversifying into healthcare

What Happened 
PREH has entered into a strategic 40/60 JV with Guangdong Boai Medical Group (GBMG) to expand into the hospital/medical services business in China. GMBG is a subsidiary of China Boai Medical Group (BOAI), one of the largest private hospital/medical services operators in China. The JV will focus on 8 core medical fields including oncology, O&G, aesthetic surgery and medicine, orthopaedics, paediatrics, ENT, dentistry and cardiology. Its first acquisition is the Modern Hospital Guangzhou, one of BOAI’s more profitable leading tumour and cancer hospital operations in Guangzhou. The price tag for PREH’s 40% share works out to be Rmb286.7m (12x FY14 EV/EBITDA) and will be funded through internal funds and bank borrowings.   
What We Think 
The benefits of this transaction to PREH is two-fold. For one, it introduces a new asset class within its developments that would complement its existing real estate business as a source of additional demand for its commercial space, and encourage cross spending between other components of the development. As a start, the Perennial Dongzhan Mall will be repositioned as a health and medical hub with a hospital, medical suites and other healthcare and wellness-related services. In the medium term, the Xian HSR and Beijing Tongzhou integrated developments could also be repositioned as such. More importantly this change would enable the group to sustain a 6-8% yield on cost for its properties. In addition, this diversification would allow the group to ride on the growth of private healthcare in China. This sector is projected to grow since China began introducing new healthcare reforms in 2009 and lifted restrictions for foreign investment in China’s private hospitals in 2012. Moreover, the rapidly rising income of the middle class could also lead to greater demand for better healthcare services. 
What You Should Do 
We maintain our current profit estimates as the initial impact from this acquisition is not significant. Maintain Add, with a target price of S$1.39, based on a 35% discount to RNAV.