Cache Logistics Trust - RHB Invest 2017-04-24: Outlook Is Uncertain

Cache Logistics Trust - RHB Invest 2017-04-24: Outlook Is Uncertain CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust - Outlook Is Uncertain

  • We stay NEUTRAL on Cache while our TP remains unchanged, at SGD0.86 (3% downside). 
  • Key concerns are the ongoing lease disputes at 51 Alps Avenue and its high gearing level. Amidst a challenging outlook for Singapore, Cache has been rebalancing its portfolio towards the more favourable Australian logistics sector, which we deem as positive. 
  • While recent changes at its REIT manager may generate potential future growth, the impact remains unclear at this juncture. 
  • Cache offers a relatively high FY17F yield of 8.1%, which limits its downside.

51 Alps Avenue lease disputes remain a drag. 

  • There are no new updates on the 51 Alps Avenue issue, where Cache Logistics Trust (Cache) is in a lease dispute with C&P Land (master lessee) and Schenker (tenant) on master lease renewals which expired on Aug 2016. 
  • Cache, currently under a holding agreement pending the resolution of the court proceedings, is receiving SGD0.77 psf/month for the property – which is well below the market rates of SGD1.10-1.40psf. 
  • In our model, we have factored in a potential resolution by the end of the year, with rental rates reverting back to market levels in 2018.

Increasing Australia exposure. 

  • Amidst a challenging Singapore market, it has been steadily growing its presence in Australia (16.3% of portfolio value). 
  • Key reasons for rebalancing are better market fundamentals, longer WALE, a freehold status with relatively high NPI yields. 
  • In Mar 2017, Cache completed the acquisition of Spotlight Property in Victoria (total cost: ~SGD26m) which should contribute positively to its books from 2Q17 onwards. The acquisition will be fully funded from sale proceeds of Cache Changi Districentre-3 (CDC-3) (SGD25.5m) in Jan 2017.

Singapore warehouse outlook still tough. 

  • Based on CBRE’s data, ~8.5m sq ft of warehouse supply is expected to come on-stream in 2017, compared to a 3-year average net demand of 5.4m sq ft. This should continue to exert pressure on its upcoming lease renewals. 
  • Overall, we expect warehouse rental Property | REITS Neutral (Maintained) rates to continue to decline by 3-7% this year.

Maintain NEUTRAL, with a DDM-based SGD0.86 TP (CoE: 8.8%, TG: 0%). 

  • Key concerns are a prolonged drag from Schenker lease disputes and high gearing levels. However Cache’s high yields limit its downside. 
  • Key re-rating catalysts are a favourable resolution of the Schenker court case, the divestment of low-yielding assets and potential M&As among smaller industrial REITs.

Vijay Natarajan RHB Invest | 2017-04-24
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 0.860 Same 0.860