Global Logistic Properties - A yen for more recycling

The yen continues to weaken but lower yields implied by the market should neutralise the impact on GLP’s asset valuations. We believe that the market is now ideal for GLP to recycle more assets in Japan to facilitate future growth or possibly a higher dividend payout. We make a few adjustments to our model 1) lower FY13-15 core EPS estimates by 17-23% for a weaker ￥ vs. US$ and earnings lost from assets injected into GLP J-REIT, 2) a 50bp decline in Japanese cap rates and 3) higher AUM fee assumptions as we expect more asset recycling in the next 12 months. Our target price which is based on SOP is raised by 8%. Maintain Outperform with catalysts from lower cap rates and asset recycling initiatives. 
  
Poised for more recycling 
The expected reflation of the Japanese economy is driving acquisition appetite for logistics properties and culminating in lower cap rates. LaSalle IM has reportedly confirmed the sale of its second portfolio held in its JLF II for around ￥90bn, implying an NOI yield of 5.2%. This is around 60bp lower than the initial portfolio that GLP acquired from the vendor at end-2011. More recently, Nippon Prologis REIT has also announced an acquisition of eight logistics properties from its sponsor for US$1.3bn. We believe that revaluation gains from GLP’s Japanese assets may come faster than expected and we expect the group to recycle more Japanese assets in 2H13.   
  
Avenues to lift valuations 
We see a few value propositions 1) There is 10ct per share upside if cap rates are compressed by 50bp. 2) An enlarged AUM platform could immediately add 10ct a share. Longer-term, we believe GLP will also adopt the same strategy for its China portfolio which, at its current pro-rata GFA of 10.3m sm, implies a larger AUM in the future. This could lift valuations by another 21ct per share. 3) The redeployment of its excess capital into China at current run rates for the next five years could lift valuations by 38ct per share. All in, we estimate potential for another 34% upside if the group succeeds in its execution. Proceeds from its initial J-REIT spin-off are still largely untapped for acquisitions. We do not dismiss the possibility of a higher dividend payout if GLP is unable to find accretive acquisitions soon.   
  
Yen remains a drag 
We estimate that a 10% decline in the ￥ would lower our SOP value by 2%.