Circumventing Complexity

BUY

Initiate Coverage

Analysts:

Stephanie WONG & Wilson LIEW

swong@kimeng.com,

wilsonliew@kimeng.com

(65) 6432 1451 / (65) 6432 1454

Price S$0.145

Target S$0.21

♦ Full-spectrum logistics player

Freight Links (FL) is a leading total logistics management and integrated logistics

service provider in Singapore. Its comprehensive range of logistics-related services

includes international freight forwarding, chemical storage and logistics, warehousing

and distribution, integrated marketing, international relocation, and record

management. The Group has a global reach of 600 destinations, supported by its

overseas offices and more than 120 freight forwarding agents. In addition, the Group

manages 1.3m sqf of warehouse space catering to an array of logistical needs.

♦ The logistics sector is poised for re-rating

According to the Economic Review Committee?s findings, logistics is a sizeable global

market, valued at around US$320b pa and an annual growth rate of 3-10%. To help

promote the industry with the view of making Singapore a global integrated logistics

hub, the Government has rolled out a number of incentives in the recent budget

announcements, such as the setting up of the 140 ha Seletar Aerospace Park. We

believe logistics assets are due for reflation and FL is a clear beneficiary.

♦ Feeding the REITs with quality assets

The regional push to attain logistics capabilities has helped to fuel the recent hunger

of industrial Real Estate Investment Trusts (REITs). Singapore-listed industrial REITs

have been busy acquiring industrial/warehouse properties, both locally and regionally.

Based on URA 1st Quarter statistics, the vacancy rate of warehouse space fell to

11.2% in 1Q07 from 14.2% just a year ago. Average warehouse rental increased 4%

Q/Q and 8.7% Y/Y. With some 1.3m GFA of warehouse space, FL is an enticing

target of ?asset-starved? REITs. Over the next 12 months, FL plans to accelerate its

balance sheet re-engineering process by divesting several warehouses to the REITs

and redeploy the capital into the higher yielding pure logistics services business.

♦ China investments coming to fruition

Over the last 2 years, FL has invested some $40m spread over 4 investments in

China. As they are in the form of convertible bonds, contributions to FL bottomline

has been negligible until these bonds are converted to equities prior to their listings in

PRC. China GSD Logistics is expected to be the 1st in the pipeline to go IPO in

Shenzhen. Based on our estimates, the group could convert its convertible bonds into

a 25% stake prior to IPO, which is worth some $56m (3.1cts/share). Hence, the group

earnings mix could change drastically with PRC accounting for a bigger share in the

near future.

♦ Circumventing complexity to expose deep value

Logistics stocks are often burdened with mounting complexity, which has turned away

investors who seek earnings clarity. FL?s ongoing efforts to optimise its balance sheet

and de-link its logistics earnings from rental income warrant a re-rating. We initiate

coverage with a BUY call and TP of $0.21, based on our conservative SOTP

valuation, which assumes zero growth in the capital values of its warehouses.