Cache Logistics Trust - Maybank Kim Eng 2015-09-08: Attractive 8.9% Yield.

CACHE LOGISTICS TRUST K2LU.SI

Attractive 8.9% Yield

Factoring in lower market rent assumptions and lower AUD.
FY15-17 DPUs cut by c.2.4%
TP SGD0.97, down from SGD1.33 on switch from DDM to yield target of 9%. D/G to HOLD. Preferred pick as current yield of 8.9% is close to target yield, implying limited downside.

Leasing environment remains challenging for warehouses. Factoring in new 2015-17 market rent assumptions of -1%/-2%/0% causes us to expect that rent reversions will trend toward negative 2-3.9% over 2016-17.

We also factor in a weaker AUD/SGD average assumption from 1.05 to 1.04. As such, our FY15-17 DPUs are cut to 8.6/8.7/8.7 cts from 8.6/9.0/9.1 cts. The average impact is 2.4% and comes mainly from 16% of leases expiring next year.
Cache has the lowest tenant expiry profile among our REITs of 2%/16%/3% for FY15-17. Despite our cuts, there is still mild growth as earnings from its BTS project with DHL should be booked in from Jan 2016.
While Cache has a low-debt maturity profile of 0%/0%/20% for FY15-17, only 67% of its interest cost is fixed, making it susceptible to higher interest rates. Our forecasts already bake in a rise in benchmark rates of +25bp/+50bp/+50bp for FY15-17.

We are changing our valuation methodology across all our REITs from DDM to yield targets to better reflect the current de-rating environment. Cache’s yield spread with Areit is rising, now at c.185bp.
Although we like Cache for its master leases and low lease expiry profile, the market has not rewarded it, perhaps due to the rental incentives it has had to give to maintain occupancies in this challenging environment. Our target yield for Cache is thus 9% vs 7.25% for Areit and 7.5% for MIT.
Applying that to our FY16 DPU lowers our TP to SGD0.97 from SGD1.33. D/G to HOLD.

Joshua Tan | http://www.maybank-ke.com.sg/ Maybank KE 2015-09-08

HOLD Downgrade BUY 0.97 Down 1.33