CIMB Research 2015-07-21: Cache Logistics Trust - Weaker margins, firm outlook. Maintain ADD.

Weaker margins, firm outlook 

  • CACHE’s results were in line with our expectation, with 2Q DPU accounting for 25% and 1H for 50% of our full-year estimate. 
  • During the quarter, the management successfully renewed the expired leases, bringing the total NLA up for renewal in FY15 to only 2%. 
  • In view of a slower industrial leasing market in 2015 coupled with the ongoing conversions, we have factored in a lower NPI margin of 86%. 
  • This lowers our DPU estimates by 10-12% for FY15-FY17. 
  • We maintain our Add rating, with a slightly lower DDM-based (discount rate: 8.3%) target price of S$1.23. 

Stable results 

  • CACHE’s 2Q15 NPI fell 5.4% yoy due to higher property expenses incurred for the conversion of three properties into multi-tenanted buildings (MTBs), while DPU remained flat (-0.3% yoy). 
  • We note that DPU was partly supported by a S$1.45m capital distribution from the divestment of Kim Heng Warehouse. 
  • Excluding the distribution, 2Q DPU accounted for 23% of our quarterly full-year estimate. 
  • Occupancy dipped slightly to 98.3% (vs. 1Q15’s 99.1%). 

Lower margins but growth from completed BTS project 

  • In 2Q, the REIT manager successfully renewed/replaced some of the leases that had expired, bringing the lease expiry profile for FY15 to a low 2% (vs. 9% in 1Q15). 
  • Based on our estimates, on the back of a sluggish rental market, the new leases were not able to make up for the loss in DPU associated with higher costs and weaker margins as these properties were converted into MTBs. 
  • With a sluggish industrial rental market outlook and more conversions expected in FY16, we have factored in weaker NPI margins of 86% (vs. 94% in FY14) for FY15-17. 
  • However, with the DHL BTS receiving T.O.P in Jul 15 (contribution expected in FY16), this property, with GFA accounting for c.15% of CACHE’s entire portfolio, will be able to lift earnings and stabilise NPI margins in the near term. 
  • Furthermore, as DHL will only take up 77% of the total GFA from Jan 16, CACHE’s management has highlighted that it is currently in negotiations to lease out some of the remaining space – potential additional income that we have not included in our model. 

Maintain Add 

  • With the DHL BTS project completed, we remain optimistic on CACHE’s outlook despite the weaker margins. 
  • As such, we maintain our Add call with a slightly lower target price of S$1.23. 

(PANG Ti Wee; LOCK Mun Yee; TAN Xuan, CFA)

Source: http://research.itradecimb.com/