Given that the STI ended 0.6% lower yesterday, Global Logistic Properties (GLP) was one of the few companies which ended positive for the day. The shares gained 2.3% day on day to close at $2.72. The property developer previously announced its 1Q14 results last Wednesday (14 Aug), the following day Macquarie Equities Research (MER) released a research paper maintaining an ‘Outperform’ rating with a 12-month target of $3.06.

GLP announced earnings per share which slid 38.6% yoy – this was below MER’s forecast due to a lower share of results from jointly-controlled entities. With China revenue growth resuming, the greatest focus post the result was concern regarding development starts versus development completions and the low cash from operating activities to underlying earnings ratio. However, MER has maintained a positive valuation due to, forecast growth in annual new starts and an expected improvement rate in completions.

Impact
Completions remained low and new leased area went backwards.Development completions in the last four quarters were just 1.34m sqm, up 16.5%. This is despite GLP development starts in FY12 1.66m sqm and FY13 2.08m sqm. Management attributed this to a greater proportion of multi-storey facilities being developed and customization requests by tenants in some projects. New leased area in the past four quarters was down 0.8% to 1.35m sqm, greater than development completions, which is not sustainable.

Low cash conversion ratio of 16.4%.The cash conversion, normalized cash from operating activities to profit after tax and minority interest, excluding revaluation and foreign exchange movements, was just 16.4% in 1Q14, significantly lower than 132.7% in 1Q13 and 100.4% in FY13. Management attributed this to fluctuating movements in relation to working capital in 1Q14 and expect the cash conversion ratio to significantly improve in the next three quarters.

China growth resuming.China growth resumed in 1Q14 with revenue up 40% YoY or 16% QoQ. In 4Q13, China revenue growth was -1% QoQ and management attributed the decline to fewer operating days and adjustments at Beijing ACL.

Solid capital position.The net debt-to-equity ratio was 11.7% as at 30 June 2013, while the net debt-to-equity ratio was 18.8% on a look-through basis. The net debt/EBITDA ratio was 2.5x and the EBITDA/interest ratio was 5.6x as at 30 June 2013.

MER’s action and recommendation
The stock is trading at a ~1.24x price to 30 June 2013 book value of US$1.79. 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 price target of S$3.06 relies upon growth in annual new starts and an improvement in the rate of completions.

Source: Macquarie Research - 22 Aug 2013