Cache Logistics Trust - Maybank Kim Eng 2016-05-31: A Complicated Renewal

CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust (CACHE SP) - A Complicated Renewal

We estimate that Schenker’s rent-renewal dispute with C&P over Schenker MegaHub in Changi may spell a 9.5% DPU risk for Cache. But as the matter is still hanging in the air and Cache has recourse to damages, we leave our estimates intact.
If the risk materialises, implied forward yield is 8.8%, just 50bps below the mean of 9.3%. We think this may have been priced in.
Maintain BUY & TP of 94 Scts, based on FY16-17 DPU and a 9% yield target, unchanged.

Schenker Megahub is currently master-leased to C&P, which in turn has an anchor lease with Schenker. Both are due for renewal in Aug 2016.
Cache announced that Schenker has exercised an option with C&P which it believed to be valid to renew its anchor lease for another five years at a “pre-agreed rental rate”, which Cache believes to be below market rate. C&P is contesting the validity of this option.

If C&P does not renew its master lease with Cache and Schenker’s option is upheld, Cache could be left with holding a below-market-rent property for five years. But as far as Cache is concerned, the matter is between C&P and Schenker.
Cache also maintains that it was previously informed by C&P that Schenker had no valid option to renew at pre-agreed rates. As such, if C&P does not renew its master lease and fails to deliver vacant possession, it will seek damages from C&P, according to its master-lease agreement, which is double the rent payable under the master lease for the duration of the holding period or damages arising from Schenker remaining on its property.

We previously flagged a 5% downside risk to FY16-17 DPU to 8.0/8.0cts if Schenker Megahub were converted into a multi-tenanted property, but maintained BUY as implied forward yields of 9.3% (from 9.8%) were just its cycle mean.
This development is similar, as Cache estimates that 1Q16 DPU would have been cut 7.3% to 1.89 Scts, if it simply accepted Schenker’s option as valid.
This implies a forward yield of 8.8%, just 50bps below its cycle mean. As such, we think the risk has been reasonably priced in.

Joshua Tan Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-05-31

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.94 Same 0.94