Cache Logistics Trust - CIMB Research 2016-05-31: Caught in a cauldron

CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust - Caught in a cauldron

Received an originating summons from Schenker to essentially make an application for the renewal of lease at Schenker Megahub @ ALPS.
We deem that CACHE is caught in a cauldron; we see more downside vs. upside.
Reiterate Hold with rising uncertainty on lease renewals.

CACHE has received an origination summons from Schenker Singapore (Schenker) in relation to the Schenker Megahub at 51 Alps Avenue, which is located in Airport Logistics Park of Singapore (ALPS). Essentially, Schenker is seeking CACHE to make an application for its lease at Megahub to be renewed.

CACHE is currently master leasing Megahub to C&P Land (C&P), a subsidiary of C&P Holdings (controlling shareholder of CWT). In turn, C&P has leased out the property to Schenker under an anchor lease agreement. Schenker is the ultimate end-user of the property. Both the master and anchor leases expire on 31 Aug 16.
Schenker has informed C&P that it intends to renew the anchor lease agreement for another five years, at a rental rate pre-agreed between C&P and Schenker when the anchor lease was entered into on 8 Jun 05. However, C&P deems that Schenker does not have a valid option to renew. The pre-agreed rental rate is below the current market rate.
As a result, Schenker is seeking to bind the anchor lease agreement to CACHE such that Schenker could essentially renew the lease at the pre-agreed rate.

CACHE views that it is not a party to the anchor lease agreement.
In the worst-case scenario that the court rules in favour of Schenker, and that the preagreed rental is applied, we estimate that our FY17 DPU could see 6% downside. We believe that the pre-agreed rental rate could be in the range of S$0.55 psf pm, while we have modelled in a rate of S$1.55 psf pm for Schenker Megahub in FY17.
CACHE has guided that its proforma DPU for 1Q16 could be 1.89 Scts vs. actual 1Q16 DPU of 2.039 Scts (c.7% downside).
In addition, CACHE could book a de-valuation loss of c.S$43m for Schenker Megahub (lower underlying income). It guided that its proforma NTA as at 1Q16 would be S$0.83/unit vs. actual NTA of S$0.88/unit (c.6% downside).
Notwithstanding the above, C&P can renew the master lease or deliver vacant possession of megahub upon expiry of the master lease agreement. If C&P does not renew the master lease and fails to deliver vacant possession of the property, CACHE is able to claim against C&P for double the amount of rent payable over the holding period OR damages arising as a result of Schenke remaining on the property.
Given that Schenker Megahub is one of the largest freight and logistics property in ALPS (gfa: c.440k sq ft), we view that it is not easy for Schenker to entirely vacate the property.

While there could be several discrete outcomes from Schenker Megahub (from worstcase scenario to renewal of master lease agreement), it is evident to us that the net result would be lower property yields, given the challenging industry landscape.
We reiterate Hold with rising uncertainty on lease renewals. About 11% of CACHE’s GRI is up for renewal in 2016. Downside risk could come from worse-than-expected renewals.
(TP: S$0.94)

YEO Zhi Bin CIMB Securities | LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2016-05-31

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 0.94 Same 0.94