Cache Logistics Trust - DBS Research 2015-10-12: Driven By Recent Acquisitions

CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust - Driven By Recent Acquisitions

While yields of > 8.0% are attractive in our view, we believe that Cache’s high gearing of close to 40%, will be a key overhang for investors as further acquisition capacity is likely to be capped. As such, we believe the stock will likely range trade till there is further clarity on this aspect.

Cache’s Singapore portfolio is expected to see rental pressure from
1. conversions of single-user properties to multi-tenanted properties,
2. heightened competition due to new supply.
As such, growth will mainly be driven from its recent acquisitions such as the four properties in Australia.
We believe Australia is an attractive target market given its long leases and the weak AUD-SGD exchange rate, which could present upside if the AUD strengthens in the medium term.

Gearing is expected to head towards c.39% by end FY15 after accounting for its latest acquisition. We note this to be at the higher end of management’s comfortable range of 35%-40% and thus further debt capacity is likely to be limited. This leads us to imply that further acquisitions are likely to be funded through a mix of debt and equity.

Our target price is adjusted to S$1.11 as we include the latest acquisition in Australia. Our HOLD call is premised on limited upside to our target price. A yield of 8.5% is likely to limit downside to current share price.

Interest rate risk. Higher interest cost is expected to eat into distributions. We note that the Manager has locked in close to 67% of its debt into fixed-rates.

Cache Logistics Trust (Cache) offers investors strong income visibility supported by a weighted average lease to expiry (WALE) of 4.6 years by GFA which is staggered across the years. The Trust has secured approximately 70% of leases expiring in FY2015 with more than 40% of GFA committed from 2019 and beyond. In addition, Cache has a much healthier average occupancy rate of 99.1% as compared to similar S-REITs. This provides strong earnings stability and visibility in both the near and medium term.

MNCs make up the majority of the type of tenants that lease Cache’s space by GFA at 79%, followed by Small Medium Enterprises at 21%. The trade sectors that tenants are from are relatively diverse, from industries such as Industrial & Consumer Goods, Commodity & Chemical, Healthcare and Food & Cold Storage. Demand from a large and diverse tenant mix has resulted in higher underlying occupancy rates which bode well for the Trust’s earning capability.

Following the maiden purchase of three warehouses in Australia in 1Q15, Cache announced the acquisition of a warehouse in Brisbane for A$27.0m (S$S$27.1), deepening its presence in Australia to four properties. The target asset is a modern one-storey warehouse with an ancillary two- story office and is leased to Western Star Trucks Australia Pty Ltd (WSTA) with average lease tenure of 7.9 years. WSTA is a wholly- owned subsidiary of Penske Automotive Group (PAG) which is listed on the New York Stock Exchange, and is the exclusive importer and distributor of trucks and other commercial vehicles in Australia.

Initial yield is estimated to be c. 7.0% and the purchase will be fully funded by debt at an assumed cost of 4.5%. The lease comes with annual rental escalation of 4% per annum, until August 2023, offering stability in returns.

A strategic partnership with its Sponsor, CWT Ltd, to embark on a build-to-suit development of the DSC ARC for DHL Supply Chain Singapore Pte Ltd achieved completion in Jul-15. Contribution from DHL is expected to start from FY16 onwards and is expected to be a key driver of growth.

Derek Tan CFA DBS Vickers | Mervin Song CFA DBS Vickers | Rachael TAN CFA DBS Vickers | http://www.dbsvickers.com/ 2015-10-12

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 1.11 Up 1.09