Cache Logistics Trust - OCBC Investment 2016-03-30: Negatives likely priced in, upgrade to BUY

CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust: Negatives likely priced in, upgrade to BUY

Operational challenges faced by Cache Logistics Trust (CACHE) were apparent in its recent 4Q15 results, as NPI for its Singapore properties fell 12.3% YoY to S$16.8m. This was largely attributed to the conversion of several properties from master lease to multi-tenancy, coupled with the subdued industrial market conditions.
The rental index and occupancy for warehouses dipped 1.6% and 0.4 ppt YoY in 4Q15, respectively, according to statistics from JTC.

Looking ahead, CACHE has 12% of its leases (by gross rental income) expiring in 2016 (as at 31 Dec 2015). This comprises largely two master leases at Schenker Megahub and Hi-Speed Logistics Centre.
There is currently no indication as to whether the master lessees would be renewing their leases. However, CACHE did manage to secure the master lease renewal at Air Market Logistics Centre recently, albeit at a negative rental reversion in the single-digit range.

We lower both our FY16 and FY17 DPU forecasts by 2.8%, largely on higher financing cost assumptions.
Nevertheless, CACHE’s current valuations suggest that the market has already priced in the uncertainties surrounding its nearterm outlook, in our view.
Based on our revised estimates, the stock is trading at FY16 distribution yield of 9.8% and P/B ratio of 0.95x. The former represents a significant premium of 2.2 standard deviations (SD) above its 5-year mean of 8.0%; while the latter comes in at 1.8 SD below its 5-year average (1.16x).
If we look at the situation from a worst-case scenario, even if we assume the occupancies for Schenker Megahub and Hi-Speed Logistics Centre to fall to 0%, our FY17 DPU forecast would slip to 7.0 S cents (excluding any capital distributions), but it still translates into a distribution yield of 8.4%, which is 0.5 SD above its 5-year average.
Taking these factors into account, we believe the market has been overly bearish on CACHE’s downside risks.
We thus upgrade the stock from ‘Hold’ to BUY on valuation grounds, with a slightly lower fair value estimate of S$0.88 (previously S$0.90).

Wong Teck Ching Andy CFA OCBC Securities | http://www.ocbcresearch.com/ 2016-03-30

OCBC Securities SGX Stock Analyst Report BUY Upgrade HOLD 0.88 Down 0.90