Cache Logistics Trust - RHB Invest 2017-04-24: Outlook Is Uncertain

CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust - Outlook Is Uncertain

We stay NEUTRAL on Cache while our TP remains unchanged, at SGD0.86 (3% downside).
Key concerns are the ongoing lease disputes at 51 Alps Avenue and its high gearing level. Amidst a challenging outlook for Singapore, Cache has been rebalancing its portfolio towards the more favourable Australian logistics sector, which we deem as positive.

While recent changes at its REIT manager may generate potential future growth, the impact remains unclear at this juncture.
Cache offers a relatively high FY17F yield of 8.1%, which limits its downside.

There are no new updates on the 51 Alps Avenue issue, where Cache Logistics Trust (Cache) is in a lease dispute with C&P Land (master lessee) and Schenker (tenant) on master lease renewals which expired on Aug 2016.
Cache, currently under a holding agreement pending the resolution of the court proceedings, is receiving SGD0.77 psf/month for the property – which is well below the market rates of SGD1.10-1.40psf.
In our model, we have factored in a potential resolution by the end of the year, with rental rates reverting back to market levels in 2018.

Amidst a challenging Singapore market, it has been steadily growing its presence in Australia (16.3% of portfolio value).
Key reasons for rebalancing are better market fundamentals, longer WALE, a freehold status with relatively high NPI yields.
In Mar 2017, Cache completed the acquisition of Spotlight Property in Victoria (total cost: ~SGD26m) which should contribute positively to its books from 2Q17 onwards. The acquisition will be fully funded from sale proceeds of Cache Changi Districentre-3 (CDC-3) (SGD25.5m) in Jan 2017.

Based on CBRE’s data, ~8.5m sq ft of warehouse supply is expected to come on-stream in 2017, compared to a 3-year average net demand of 5.4m sq ft. This should continue to exert pressure on its upcoming lease renewals.
Overall, we expect warehouse rental Property | REITS Neutral (Maintained) rates to continue to decline by 3-7% this year.

Key concerns are a prolonged drag from Schenker lease disputes and high gearing levels. However Cache’s high yields limit its downside.
Key re-rating catalysts are a favourable resolution of the Schenker court case, the divestment of low-yielding assets and potential M&As among smaller industrial REITs.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-04-24

RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 0.860 Same 0.860