Cache Logistics Trust - CIMB Research 2016-10-21: 3Q16 Devaluation Loss Of S$36.1m

CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust - 3Q16 Devaluation Loss Of S$36.1m

9M16 DPU of 5.875 Scts (-9% yoy) was in line with our expectations but below consensus, forming 78% of our full-year forecast. We expect a poorer 4Q16.
Devaluation loss of S$36.1m from 51 Aps Ave. NAV/unit decreased to S$0.83/unit (FY15: S$0.88/unit). Gearing increased to 41.2% (1H16: 39.8%).
We believe that CACHE would look to capital recycling in the near term to pare down gearing.

Minimal lease expiries in FY17 but CACHE’s wall of worry would come in FY18 when 26.8% of GRI is up for renewal.
Reiterate Reduce on declining DPU profile. Our DDM target price is unchanged.

CACHE achieved DPU of 1.847 Scts (-14% yoy) for 3Q16, forming 25% of our FY16F.
On a like-for-like basis, excluding the capital distribution from the divestment of Kim Heng Warehouse, 3Q16 DPU would have fallen by 5% yoy.
Distributable income grew by 8% yoy due to incremental revenue from Australian acquisitions and DHL Supply Advanced Regional Centre, offset by lower income for 51 Alps Avenue.
Under a holding agreement, CACHE would receive S$0.77 psf pm (prev. c.S$1.50) from Sep onwards.

NAV/unit decreased to S$0.83/unit (FY15: S$0.88/unit) on devaluation loss from 51 Alps Ave.
Due to the ongoing legal dispute with Schenker (refer to our report “In an impasse” 27 Sep 2016), the Manager undertook an independent valuation of the property, resulting in a downward valuation of the property to S$80.7m (FY15: S$116.8m).
We understand that the major change in the valuer’s assumptions was rental rates and growth rate. Otherwise, the property’s cap rate was unchanged at c.6.5%.

Due to the devaluation loss, gearing increased to 41.2%. The S$80.7m valuation for 51 Alps assumed market rent (S$1.40-1.50 psf pm) for Schenker’s lease renewal of five years.
In the worst case scenario where CACHE is bound to the pre-agreed rent of S$0.77 for five years, the market value of 51 Alps would be S$66.6m.
In this case, gearing would increase to 41.3% and NAV would be 81.3 Scts/unit.
In the near term, CACHE would look to capital recycling to pare down gearing.

As at 9M16, committed portfolio occupancy stood at 96.5%.
CACHE secured 296k sf of new leases in 3Q16, and converted Hi-Speed Logistics Centre to a multi-tenanted building (MTB). However, this implies like-for-like negative rental reversion and higher property expenses. Looking ahead, 3.9% of GRI is up for renewal in 2017.
CACHE’s wall of worry would come in 2018 when 26.8% of GRI is up for renewal. Of which, c.16% relates to CWT Commodity Hub, which we believe would be converted to a MTB.

There were no new updates on the legal dispute with Schenker, though we believe that the case could drag through to end-2017. This implies that CACHE would be receiving rent of S$0.77 psf pm for 51 Alps for one full year. Coupled with higher property expenses from MTBs (i.e. Hi-Speed Logistics), this explains our 5% drop in FY17F DPU.
Reiterate Reduce with an unchanged DDM target price (S$0.80).
Upside risk is the resolution of the case in CACHE’s favour. Our numbers incorporate the worst case scenario.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2016-10-21

CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 0.80 Same 0.800