Cache Logistics Trust - DBS Research 2016-09-28: Interim solution for 51 Alps Avenue

Cache Logistics Trust - DBS Vickers 2016-09-28: Interim solution for 51 Alps Avenue CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust - Interim solution for 51 Alps Avenue

  • Holding agreement reached, Schenker to pay S$0.77 psft/m until further rulings from the Court.
  • FY17F DPU could drop by 4.0% under the worst case scenario.
  • Financial gearing may edge up to c.42%, implying higher likelihood of equity fund raising.
  • Downgrade to HOLD, TP remains at S$0.93.



Downgrade to HOLD, TP unchanged at S$0.93. 

  • The last traded price reached our TP of S$0.93, leaving limited upside potential. We believe that at 8.1% FY17F yield, the price is fair given the uncertainties owing to the oversupply in the overall Singapore warehouse market. 
  • We see more pressure on Cache’s organic growth potential. Downgrade to HOLD.


An interim solution to 51 Alps Avenue; eyeing final resolution in the medium term. 

  • A holding arrangement has been reached with Schenker in relation to 51 Alps Avenue until the Court’s final judgement of the dispute. The timing of the final judgement is uncertain at this point. 
  • In the interim, Cache has agreed to receive in “protest”, Schenker’s rent of S$0.77 psft / month until further resolution. 
  • Our current FY17F DPU estimate is 7.5 Scts. Under the worst-case scenario, FY17F DPU will drop by 4.0% to 7.2 Scts. 
  • We understand that decline in future cashflows will also result in a c.S$44m write-off in the property valuation and thus, gearing will inch higher to c.42%.


Cache may need to address its gearing in the near term.

  • A scenario of a higher gearing at 42% (vs 45% regulatory cap) and above the management’s comfortable level of 35-40% is likely to result in an overhang in the share price of Cache in the immediate term. 
  • We believe that the manager could consider to re-cycle capital through divestments or acquisitions (funding through equity) to pare down its gearing. Depending on the strategy undertaken by the management, potential DPU dilution is possible and has not been accounted in our model yet.


Valuation

  • Our target price remains at S$0.93. Given total return is below 5%, we have downgraded our recommendation to HOLD.


Key Risks to Our View

  • Schenker’s rent dispute. The rent dispute at 51 Alps Avenue (Schenker Megahub) is pending the Court’s resolution with an uncertain timeline. If the Court rules to settle the rent significantly below the market price (which is also our assumption), there could be further pressure on TP and DPU.




Derek Tan DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-09-28
DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 0.93 Same 0.930



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