Cache Logistics Trust - OCBC Investment 2016-10-24: Overhang Over 51 Alps Ave; Downgrade To HOLD

CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust - Overhang Over 51 Alps Ave; Downgrade To HOLD

Cache Logistics Trust (CACHE) reported its 3Q16 results which fell short of our expectations.
Gross revenue rose 21.2% YoY to S$28.0m, but NPI increased at a slower pace of 17.5% due to continued margin pressure for its Singapore properties.
DPU slipped 13.7% YoY to 1.847 S cents, attributable to higher finance costs, an enlarged unit base and a one-off capital distribution of S$1.5m (0.192 S cents/unit) in 3Q15 arising from the sales proceeds of an asset disposal.
Even if we exclude the one-off capital distribution, CACHE’s adjusted DPU still fell 5.2% YoY in 3Q16. On a 9M16 basis, CACHE’s gross revenue and NPI jumped 27.9% and 17.0% to S$84.0m and S$66.7m, respectively, with the latter forming 71.2% of our FY16 forecast.
DPU of 5.875 S cents represented a decline of 8.6% (-5.9% if we exclude capital distributions) and constituted 72.3% of our full-year projection.

Given the ongoing legal dispute relating to its 51 Alps Avenue property, management engaged an independent valuer to value the asset, resulting in a downward fair value adjustment of S$36.1m to S$80.7m, as at 30 Sep 2016. If an unfavourable outcome is reached for CACHE whereby it is bound by Schenker’s renewal rental rate under the Anchor Lease Agreement between C&P (former master lessee of the property) and Schenker for five years, the fair valuation of 51 Alps Avenue would instead be S$66.6m.
As a result of this asset write-down, CACHE’s gearing ratio increased from 39.8% (as at 30 Jun 2016) to 41.2%.

CACHE’s share price has appreciated 6.0% since our upgrade on 30 Mar 2016 (total returns of 10.9%). However, we believe the ongoing uncertainty over the outcome of the legal disputes at its 51 Alps Avenue property will affect investor’s sentiment on the stock, while earnings visibility has also been clouded.
We incorporate lower rent assumptions at this asset on a worst case scenario basis, and also factor in lower NPI margins for its other Singapore properties. Correspondingly, we cut our FY16 and FY17 DPU forecasts by 6.6% and 11.8%, respectively.
Our fair value estimate dips to S$0.85 from S$0.95.
Downgrade to HOLD

Wong Teck Ching Andy CFA OCBC Investment | http://www.ocbcresearch.com/ 2016-10-24

OCBC Investment SGX Stock Analyst Report HOLD Downgrade BUY 0.85 Down 0.950