Last Thursday, warehouse operator Global Logistic Properties – which sees Japan accounting for 71.78% of its 2012 revenue – announced its company earnings where fourth-quarter net profit surged 43% to US$224mn on revaluation and foreign exchange gains while full year net profit rose 27% to US$684mn on strong development momentum and rental growth in China.

Macquarie Equities Research says “I gotta have faith-a-faith-a-faith”
In a report released on 24May, Macquarie Equities Research (MER) dissected GLP’s earnings results:

The underlying EPS was US$0.0699 up 10.5% year-on-year (YoY), which is in line with consensus. Perhaps the greatest focus post the result was concern regarding growth in China relating to development starts versus development completions, quarter-on-quarter (QoQ) revenue growth and EBIT margin contraction.

Gotta have faith that completions will accelerate. Development completions were just 1.2 million sqm up 15.4%. This is despite GLP development starts in FY11 1.22 million sqm, FY12 1.66 million sqm and FY13 2.08 million sqm. Furthermore, 'Properties under development or being repositioned' has been more than 1.56 million sqm since 4Q11. MER believes no satisfactory explanation was provided for the weak development completions. New leased area while down 10.1% to 1.43 million sqm was greater than development completions and this is not sustainable.

China quarterly performance, a red flag. While the China revenue grew 58% in FY13, we note that the China revenue and underlying earnings before interest and tax (EBIT) margin declined QoQ in 4Q13. Management attributed the revenue decline to less operating days and adjustments at Beijing ACL, while the margin contraction was due to joint venture revenue consolidation, un-capitalised land use taxes, one-off EBIT adjustments at Beijing ACL and some other seasonal adjustments.

Japan & Brazil – on track and development starts to accelerate. In FY13, excluding J-REIT, Japan revenue was up 5% YoY, mainly benefitting from the new fund management business. The development starts during the period was 68,000sqm, while the company guided a bullish development new starts target of 400,000sqm in FY14. Similarly, in Brazil, the company guided a new starts target of 310,000sqm, compared to 101,000sqm new starts achieved in FY13.

MER’s outlook on GLP
The stock is trading at approximately 1.32x price to 31 March 2013’s book value of US$1.77. The delta in MER’s valuation is in the assumptions regarding future development completions, capital re-cycling through fund launches and new market entry. MER’s 12-month price target of $3.22 is sensitive to and relies upon growth in annual new starts and an improvement in rate of completions. MER maintains its Outperform recommendation on GLP.

Source: Macquarie Research - 28 May 2013