Cache Logistics Trust - Net Asset Value Down, Gearing Up
- FY16 DPU 7.73Scts missed expectations; down 9% y-o-y due to lower rents and enlarged unit base.
- NAV fell 11.4%, lifting gearing to 43.1%.
- Divestment of DC3 to repay debt and potential equity fund raising to address high gearing.
- TP revised down to S$0.77 from S$0.93, and DPU forecast trimmed by 3-5%.
- Maintain HOLD.
Maintain HOLD, TP revised down to S$0.77.
- We maintain our HOLD call due to the uncertainty of the outcome regarding the Schenker dispute, potential revaluation loss, and possible equity fund raising to address its high gearing.
- We have also trimmed DPU estimates for the next two years by 3-5% mainly due to the divestment of Cache Changi Districentre 3 (DC3).
- Our DPU estimate for FY17F is 7.26Scts (vs 7.51Scts previously). We think NAV could decline further.
- While yields are attractive at above 9%, we believe that uncertainties owing to the oversupply in the overall Singapore warehouse market and more pressure on Cache’s organic growth outlook will cap re-rating opportunities.
Interim solution to 51 Alps Avenue a key overhang.
- We expect pressure on earnings arising from the holding arrangement with Schenker in relation to 51 Alps Avenue until the Court’s final judgement of the dispute.
- In the interim, Cache has agreed to receive in “protest” Schenker’s rent of S$0.77 per square foot per month until further resolution. Under the worst-case scenario, FY17F DPU could drop by 4.0% to 7.0Scts.
Need to address its gearing soon.
- As anticipated, further property write offs led to NAV being slashed by 11.4% in FY16, and this pushed gearing up to 43.1% (vs 45% regulatory cap).
- Assuming sales proceeds from DC3 is used to pay off debts, gearing would have only moderated to c.42% which is still above management’s comfortable level of 35-40%. We believe that the Manager will undertake an equity fund raising and/or divest more assets to pare down its gearing. Depending on the strategy, DPU dilution is possible, and is factored in our model.
- Our DCF-based TP was revised down to S$0.77 (0.99x P/NAV) from S$0.93 (1.12x P/NAV).
- FY17-18F DPU trimmed by 3-5%.
Key Risks to Our View
- Schenker’s rent dispute. The rent dispute is pending the Court’s resolution. Further price pressure ahead if the Court rules to settle the rent significantly below market price.