Cache Logistics Trust (CACHE SP) - Diversification mitigates risks
1Q17 slightly better than expected
- Cache saw slightly better than expected 1Q17 results on the back of lower borrowing costs, with gains from earlier refinancing efforts.
- Looking ahead, we see no change to both drivers and risks, with the Australian expansion intact, cushioning supply pressures in the Singapore warehousing market.
- With a stretched balance sheet limiting upside from further inorganic growth opportunities, and share overhang from the unresolved rent dispute at 51 Alps Ave, we maintain unchanged our forecasts, HOLD recommendation, and DDM-based SGD0.95 TP.
- We prefer Ascendas REIT (AREIT SP, BUY, TP SGD 2.85) for its Singapore business parks exposure.
Operational weakness expected
- Cache reported 1Q17 revenue of SGD27.1m (-2.9% YoY, -0.8 QoQ), with NPI at SGD20.8m (-5.8% YoY, -2.6% QoQ).
- Contribution from the DHL Supply Chain ARC and Laverton North Spotlight warehouse in Australia acquired in Mar 2017 helped mitigate lower revenue from 51 Alps Ave and Changi Districentre 3, which was divested in Jan 2017.
- DPU at S1.80cts (- 11.7% YoY, -2.7% QoQ) was slightly ahead at 27% of our FY17E, on lower borrowing costs (-4.2% YoY, -8.4% QoQ).
Prudent capital management, gearing high
- Cache’s aggregate leverage remained unchanged during the quarter at 43.1%, with its all-in financing cost at 3.47%, down from 3.52% in 4Q16, following a refinancing exercise in Nov 2016.
- Cache has hedged 70.8% of its SGD loans and 50.0% of its onshore AUD borrowings into fixed rates, with 94.9% of its distributable income hedged or derived in SGD, implying minimal currency risks.
- Cache has no refinancing needs till 2018.
Maintain HOLD, TP SGD0.95
- Cache has not provided fresh news on its 51 Alps Ave asset, and as a result we are keeping our forecasts unchanged.
- Within the subsectors, we view the outlook as more challenging for warehouses, with new supply in 2017 adding 9.7% to total stock, versus 4.4% for factories and 0.2% for business parks.
- Remain HOLD and SGD0.95 TP.
- Earlier-than-expected pick-up in leasing demand driving improvement in occupancy.
- Better-than-anticipated rental reversion trend.
- Accretive acquisitions.
- Prolonged slowdown in economic activity could reduce demand for industrial space, resulting in lower occupancy and rental rates.
- Termination of long-term leases contributing to weaker portfolio tenant retention rate.
- Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.