Cache Logistics Trust - CIMB Research 2016-09-27: In an impasse

CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust - In an impasse

CACHE has agreed to a holding arrangement with Schenker where Schenker would pay CACHE S$0.77 psf pm during the holding period.
CACHE will receive the rent “under protest”, though this would provide an interim solution for unitholders as the property would not have been income-producing.
We incorporate worst-case scenario and cut our FY16 DPU by 1.6% and our FY17- 18 DPU by 6%. In our best-case scenario, we would raise our FY17-18 DPU by 4%.

With earnings uncertainty, we downgrade CACHE from Hold to Reduce, with a lower DDM-based target price.

Pending the resolution of the court proceedings initiated by Schenker (refer to “Caught in a cauldron” 31 May 2016), CACHE has agreed to a holding arrangement with Schenker. Accordingly, Schenker would pay CACHE S$0.77 psf pm (i.e. the rental rate pre-agreed between C&P and Schenker under their original anchor lease agreement signed in Jun 2005 for the property at 51 Alps Avenue).

As a recap, C&P was the master lessee of the property, and in turn, leased out the property to Schenker under an anchor lease agreement. Both the master and anchor leases are back-to-back, and expired on 31 Aug 16.
However, Schenker refused to move as it wants to exercise its option to renew its anchor lease for another five years, at the pre-agreed rate of S$0.77 psf pm. Hence, it filed a summons against CACHE, seeking to bind the anchor lease agreement upon the trust.

For now, CACHE will receive the rent "under protest", meaning that it is not technically agreeable to the rent figure, but will accept it under the holding arrangement. This also provides an interim solution for unitholders as the property would not have been income producing during the court proceedings which we believe could drag.

We incorporate the worst-case scenario that the courts would rule in favour of Schenker, and CACHE would receive the pre-agreed rent for the next five years.
Note that the S$0.77 psf pm is a single net rent whereby CACHE would incur property taxes and land rent.
Previously, we had assumed a triple net rent of c.S$1.50 from this property (i.e. the master lease rate CACHE would have received from C&P).
Factoring in the worst case scenario, we cut our FY16 DPU by 1.6% and our FY17-18 DPU by 6%.

Aside from damages claimable from C&P, a court ruling in favour of CACHE would imply that CACHE could be able to negotiate a market rent with Schenker.
According to JTC, gross market rents in the proximity of Alps Avenue is c.S$1.50-1.60 psf pm. Factoring this, we would raise our FY17-18 DPU by 4%, and increase our target price to S$0.86.

With earnings uncertainty, we downgrade CACHE from Hold to Reduce, with a lower DDM-based target price of S$0.80 (increase beta from 1.05 to 1.1).
We note that we have not fully accrued for the legal expenses; and that there could be potential NAV downside from de-valuation loss of the property.
CACHE earlier guided that its proforma NTA as at 1Q16 would be S$0.83/unit vs. actual S$0.88/unit (c.6% downside).
Upside risks are fast resolution in CACHE’s favour and better demand-supply dynamics.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2016-09-27

CIMB Research SGX Stock Analyst Report REDUCE Downgrade HOLD 0.80 Down 0.880