Cache Logistics Trust - DBS Research 2016-04-25: Negatives priced in

CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust - Negatives priced in

1Q16 DPU declined 5% y-o-y but weakness is expected and likely priced in
Expiring master leases in 2H16 not a concern given robust underlying occupancies
Revised estimates to account for possible lower rents; yields of > 8.5% attractive

Cache Logistics Trust offers yields of close to 9.0% as attractive, one of the highest among industrial S-REITs.
We believe that most negatives are already priced into its share price. Worries of master leases likely overdone.
We understand that underlying occupancies for both properties (Schenker Megahub and Hi-Speed Logistics Centre) are fairly high and given the strategic location at airport logistics hub where there is minimal new supply, demand for the space should remain resilient, despite the current weak operating climate, made worse by new supply from completions.
In addition, we believe that earnings is supported by a quality portfolio of warehouses ramping-up, which will enable the REIT to weather the downtown better than peers.

We have conservatively assumed 10% dip in rents in our estimates (vs 3% decline previously). This led us to lower our forward DPU estimates by 3% (FY16) and 9% (FY17).
In addition, we also assumed lower net property income margins to account for higher than expected operating costs.
Based on the revised estimates, the stock offer an attractive > 8.5% yield.
We have also assumed a return of capital of S$7m will enable the REIT to ride out near term headwinds (higher expenses and lower rentals from rental reversions).

Our target price is revised to S$0.93 to account for lower DPU estimates.
Our BUY call is premised on attractive total return of 14%. Yields of close to 9.0% should 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.

Derek Tan DBS Vickers | Mervin Song CFA DBS Vickers | http://www.dbsvickers.com/ 2016-04-25

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.93 Down 0.96