Cambridge Industrial Trust - DBS Research 2016-10-26: Still Feeling the Pain of Transition

Cambridge Industrial Trust - DBS Vickers 2016-10-26: Still Feeling the Pain of Transition CAMBRIDGE INDUSTRIAL TRUST J91U.SI

Cambridge Industrial Trust - Still Feeling the Pain of Transition

  • 3Q16 DPU of 0.987Scts missed expectations due to lower than anticipated margins.
  • Occupancy rate of 93.7% at the expense of negative rental reversion of 4.5%.
  • JV partner for Australian acquisitions has decided to cease the partnership.
  • Maintain HOLD, TP S$0.54.



Transitional pain to continue, HOLD. TP S$0.54. 

  • Cambridge Industrial Trust (CREIT) remains in the midst of a portfolio reposition in the midst of the current downtown in the industrial space. 
  • While portfolio occupancy remains fairly high, it is at the expense of declining rents, a painful but justified strategy for the REIT. A couple of road bumps : 
    1. its Australian partner is terminating its joint venture, putting a pause to plans to develop and grow an Australian business; and 
    2. more potential downside to DPUs on the back of more conversions from singletenanted properties to multi-tenanted ones. 
  • Our TP and estimates are cut by 8% on the back of lower margin assumptions. 
  • Maintain HOLD, TP S$0.54.


Asset recycling to redeploy capital; looking to Australia. 

  • CREIT has been active in acquisitions, and is focusing on optimizing its portfolio performance through strategic asset enhancement initiatives (AEIs) and divestments to redeploy capital to higher yielding sources. 
  • While its Australia JV partner has ceased the partnership, the Manager remains committed to its long-term acquisition strategy in Australia and is actively exploring other opportunities.


Outcome of strategic review key to re-rating. 

  • The Manager is conducting a strategic review of CREIT’s business and operations to fulfill its strategy of maximising value for its unitholders and has appointed Goldman Sachs (Singapore) Pte to assist in its analysis. 
  • The strategic review may open up a myriad of scenarios (M&A, trade sale or even an internalisation). Any incremental steps taken by the Manager to drive value should be well received by investors.


Valuation

  • Our DCF-backed TP is S$0.54. The stock is offering c.7.4% yield, which we believe will cap further downside to share price. 
  • Maintain HOLD.


Key Risks to Our View

  • Interest rate risk. Any increase in interest rates will result in higher interest payments which will reduce income available for distribution and DPUs.




Derek Tan DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-10-26
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.54 Down 0.600



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