Cache Logistics Trust - Awaiting Schenker resolution
- 1Q17 results in line; DPU dropped 11% y-o-y.
- Minimal expiries for the rest of 2017.
- Higher gearing remains an overhang in our view.
Maintain HOLD, TP unchanged at S$0.77.
- Maintain our HOLD rating on Cache Logistics Trust (Cache) as there is uncertainty on the outcome of Schenker’s holding arrangement which currently has a negative impact on earnings.
- While yields are attractive at 8.4%, we believe that uncertainties owing to the oversupply in the overall Singapore warehouse market in 2017 and the lack of clarity regarding the timing of the resolution of the court case imply limited re-rating catalysts.
1Q17 DPU falls by 11%, in line with expectations.
- Gross revenues and net property income came in 2.9% lower y-o-y to S$27.1m and S20.8m respectively. The decline in operational performance was mainly due to lower income received under protest from 51 Alps Ave and loss of income from the sale of Cache Changi Districentre 3.
- The drop in revenues was offset by higher income from DHL property and an expanded portfolio in Australia. As a result, distributable income fell by 11.0%, which included a S$0.9m capital distribution from the proceeds of sale of Kim Heng warehouse.
- DPU fell by 11.7% as a result of higher unit base to 1.8 Scts.
Gearing of 43% is one of the highest among peers.
- Current gearing is above the management’s comfortable level of 35- 40%. We believe that the Manager may consider re-cycling capital through divestments or acquisitions (funding through equity) to pare down its gearing.
- Depending on the strategy, potential DPU dilution is possible and has not been factored into our model yet.
- Our target price remains at S$0.77. HOLD call maintained.
Key Risks to Our View
- Schenker’s rent dispute. The rent dispute at 51 Alps Avenue (Schenker Megahub) is pending the Court’s resolution but the timeline is uncertain. 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.