CIMB Research 2015-07-23: Cambridge Industrial Trust - Fewer upcoming conversions. Maintain HOLD.

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A more stable outlook 

• CIT’s 2Q15 results were in line with our forecast, with the quarter’s DPU accounting for 24% of our full-year estimate and 1H DPU comprising 48% of our FY15 estimate. 
• With only one property to be converted while the other scheduled for AEI in FY15, we expect NPI margins to stabilise at the current level. 
• Given this and the flattish outlook of CIT on the back of a sluggish leasing market in the industrial sector, we maintain our Hold rating with a slightly higher DDM-based target price of S$0.73 as we roll-forward our earnings estimate. 

2Q results in line with estimates 

• Cambridge Industrial Trust’s (CIT) 2Q15 results were in line with our estimates, with revenue rising by 13.2% yoy while DPU dipped slightly by 2.1% yoy. 
• The stronger topline was mainly attributed to additional contributions from properties acquired and completed AEIs in FY14. 
• For 1H, of the 497,600 sq ft of leases renewed, a positive rental reversion of 6.3% was achieved. 
• Occupancy as at 31 Mar rose slightly to 95.5% vs. 95.0% in 1Q15. 

Fewer upcoming conversions

• CIT’s DPU’s weakness was largely a result of the enlarged share base from the distribution reinvestment plan. 
• We noted that NPI margins in this quarter stabilised at 77.7% (vs. 77.3% in 1Q15) as the number of conversions from single-tenanted buildings to multi-tenanted buildings shrank. 
• For the rest of the year, with only two more properties to be converted into MTBs, we believe that NPI margins should hover around the current level. 
• Furthermore, with occupancy rates from the converted buildings starting to creep upwards, we are confident that CIT’s portfolio will remain stable for the rest of 2015. 
• Given its leverage ratio of 37.2%, on the back of a tight acquisition market, we believe that the REIT will continue to grow marginally by conducting AEIs in some of its projects. 
• With no major debt due to be refinanced till 2017 and 96.5% of its interest expense hedged at a fixed rate for the next 3.5 years, CIT is well shielded from a potential rate hike. 

Maintain Hold 

• Though the outlook is stable, we see little reason to be excited over CIT given the limited room to expand inorganically on the back of a sluggish rental market. 
• CIT now offers a FY15-16 dividend yield of 7.3-7.5% - a level similar to its peers. 
• Maintain Hold. 

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

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