Cache Logistics Trust - Risk-reward finely balanced; upgrade to Hold
- 1Q17 DPU of 1.80 Scts (-11.7% yoy) ahead of Bloomberg consensus and our expectations, at 26% of our full-year forecast.
- We expect stronger quarters ahead with contributions from the acquisition of the Spotlight warehouse, which was completed on 22 Mar 17.
- Portfolio occupancy improved from 96.4% at end-16 to 97.2% at 1Q17.
- All-in financing costs for 1Q17 was lower at 3.47% vs. 3.52% in 4Q16.
- We believe the market has digested the negativity surrounding 51 Alps Ave, and hence upgrade CACHE to Hold. That said, slight NAV erosion risks still remain.
1Q17 results ahead of our expectations
- The positive variance sprang from better-than-expected contributions from the DHL and Australian properties as our assumptions were conservative.
- Also, we expect stronger quarters ahead with contributions from the acquisition of the Spotlight warehouse, which was completed on 22 Mar 17.
- Excluding capital distribution from the divestment of Kim Heng warehouse, 1Q17 DPU would have fallen a lower 8.5% yoy. We estimate S$0.7m remaining gains from the divestment of Kim Heng warehouse or 0.074 Scts/unit.
1Q17 financial highlights
- Revenue fell 2.9% yoy on lower contributions from 51 Aps Ave and sale of Changi Districentre 3 (divested on 23 Jan 17), partially offset by contributions from the Australian portfolio.
- NPI decreased at a sharper 5.8% yoy as Hi-Speed Logistics Centre was converted to a multi-tenanted building (MTB). Plus, there were one-off divestment expenses associated with Districentre 3.
- NPI margin was 76.8% in 1Q17 vs. 78.3% in 4Q16. Factoring in financial leverage, distributable income from operations fell 8.5% yoy.
Leasing activities during the quarter
- Portfolio occupancy improved from 96.4% at end-16 to 97.2% at 1Q17, with higher occupancies at Changi Districentre 1, the DHL property and Coopers Plains, Qld. Some 80k sq ft of leases were executed during the quarter, of which more than half were new leases. 4.4% of GRI will be up for renewal for the remaining year.
- All-in financing costs for 1Q17 was lower at 3.47% vs. 3.52% in 4Q16, due to cost savings from the refinancing of a S$90m 5-year loan in Nov 16. There will be no borrowings due for refinancing till 2H18.
- Aggregate leverage stood at 43.1%, prompting cash-call concerns.
Raise FY17-19F DPU by 4.3-9.5%
- We lift our FY17-19F DPU by 4.3-9.5% as our assumptions for the DHL and Australian properties were on the conservative side.
- We also incorporate higher NPI margins for FY18-19F as we could be too pessimistic on CWT Commodity Hub being converted to a MTB (master lease expires in Apr 18).
- Lastly, we factor in the divestment of Cache Changi Districentre 3 and the acquisition of the Spotlight warehouse.
Risk reward finely balanced; upgrade to Hold
- We believe the market has digested the negativity surrounding 51 Alps Ave. Our numbers have factored in the worst case for 51 Alps Ave; and there would be upside to our DPU (but not NAV) if the courts rule in favour of CACHE.
- We upgrade the stock from Reduce to Hold, projecting total returns of 2.2%.
- Our DDM-based TP is raised (from S$0.71 to S$0.82) on the back of the DPU upgrades as well as a sector-wide decrease in Singapore discount rate.
- Upside/downside risks hinge on Singapore logistics market, acquisitions and outcome for the legal proceedings on 51 Alps Ave.
- While 8.2% FY17F yield is attractive, CACHE is trading at 1.1x P/BV. There are NAV erosion risks if the courts do not rule in favour of CACHE, and 51 Alps Ave would be devalued from S$80.9m to S$66.9m, translating to NAV erosion of 1.55 Scts/unit.
- We are also concerned of a potential cash-call.