Cache Logistics Trust - CIMB Research 2015-12-09: Attractive dividend yields

CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust - Attractive dividend yields

Moving towards a multi-tenanted lease profile.
Margins under pressure; but occupancy still resilient.
DHL BTS to offset cost pressures.
Proposed warehouse acquisition in Adelaide, Australia. Partially funded by private placement
Maintain Add on attractive dividend yields.

Cache’s 3Q15 NPI was down 4% yoy to S$18.8m due to the conversion of several properties from master lease to multi-tenancy, which led to a slight increase in vacancy and the trust assuming direct obligation for property expenses.
Cache derives 64% of its revenue from single-tenant master leases with fixed rental escalations, and 36% from multi-tenanted buildings. The Master Lessees (sponsors CWT and C&P) are expected to gradually wind down their exposures to c.50% of the original space taken up.

Post-conversion of four master-leased properties to multi-tenanted properties, NPI margins have narrowed from 94% in 3Q14 to 81% in 3Q15. However, occupancy remained relatively high at 95.2%.
Given continued new supply (+5.6% growth in 2016 vs. +5.2% in 2015), and the imposition of several cooling measures in the industrial market (e.g. revision in JTC subletting policy), we expect flat warehouse rents of S$2 psf.

With DHL BTS receiving T.O.P in Jul 15 (contribution expected in FY16), we expect the property to lift earnings and stabilise NPI margins. Its GFA accounts for c.15% of Cache’s entire portfolio.
Furthermore, as DHL will only take up 77% of the total GFA from Jan 16 onwards, upside could come from leasing out the remaining space.

Expanding its reach into Adelaide, Cache has proposed the acquisition of a distribution warehouse for A$57.3m, which is expected to generate c.8.9% NPI yield in the first year (GLA of 58,795 sq m). Upon completion of the acquisition, the property will be fully master-leased to Metcash Trading, an ASX-listed company on a triple net lease structure, with an annual rental escalation pegged to the CPI.
The acquisition would be partially funded by its recent private placement (106.3m new units at S$0.941/unit).

Cache offers forward dividend yields of 9-9.7%, the highest among the industrial REITs.
Moreover, it has one of the longest WALE (weighted average lease expiry) of 4.3 years by NLA, with the lowest tenant lease expiries of 1% in 2015.
We shave our FY15-17 DPU by 3-13% as we incorporate the recent dilutive effects from the S$100m-rights issue, which is partially offset by the two recent acquisitions in Australia.
That said, given the recent share price correction, we maintain Add on the stock, with a lower DDM-based target price of S$1.08.

LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2015-12-09

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.08 Down 1.23