Yesterday, GLP gained another 1.8% to close at $2.88, just two days after crossing back above the $2.80 resistance level again. The company which announced its third quarter 2014 results after market on Friday has since risen 2.9%, versus the STI’s 1.1%.
 
In latest news, the company announced after market last night a landmark agreement to divest up to a 34% stake in its China business.Macquarie Equities Research’s (MER) has released a research note on the back of this announcement, and explain why they have increased their 12-month target price of GLP by 9.1%.

Impact
Transaction details. The agreement was signed with an investor consortium, including Bank of China Group Investment, HOPU Logistics Investment Management and a large Chinese insurance company, as well as other state-owned companies and institutional investors. The transaction entails GLP divesting up to a 34% stake in its China business for US$2.35b to the consortium (30.3% stake) and certain GLP employees (3.7% stake), which will be paid in two tranches of US$1.48b and US$875m in new shares in a restructured China Holdco that will hold all of GLP’s operations in China. Based on MER’s estimates, the price-to-book (P/B) of the transaction equates to circa 1.0x. Concurrently, a US$163m private placement of 74.3m shares (1.5% of share base) in GLP will be undertaken to the consortium at S$2.755, representing a 4.4% discount to the last traded price and 22% premium to 3QFY14 net asset value (NAV).
 
Near-term impact. The new capital enables GLP to accelerate its development pace in China’s US$2.5t logistics sector, due to improved access to strategic land holdings and increased business opportunities with the investor consortium. With the logistics space seeing rising competition (including e-commerce firms), the deal will further strengthen GLP’s market leader position. Leasing momentum should also gather pace, as existing customer relationships will expand, hence enhancing the “network effect”.
 
Medium-long term impact. Key employees will be incentivised to stay and work harder, given that they can now participate in GLP’s growth, which is important in view of rising competition for talent. In the longer term, a potential listing of the China business could further enhance shareholder value.

Earnings and target price revision
MER has adjusted GLP’s core earnings per share (EPS) in FY14, FY15 and FY16 by -15.8%, -16.9% and -18.0%, respectively to factor in changes in development starts and rent assumptions. Its 12-month target price of GLP has been increased by 9.1% to S$3.34 due to higher valuation of China’s land reserve and latest book value. MER has not factored in impact from this landmark agreement.
 
Action and recommendation
GLP offers a direct proxy to China’s (63% of NAV) growing logistics sector, which is well-supported by a rising urbanisation rate and resilient domestic consumption. This transaction and November 13’s US$3b China-focused CLF Fund I (86% of capital allocated) provide testimony of the growing confidence in China’s logistics sector despite a slowing economy. MER maintains an Outperform rating over GLP.

Source: Macquarie Research - 19 Feb 2014