Cache Logistics Trust - CIMB Research 2017-07-21: Downside Risks Stick Out As Share Price Dials Up

CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust - Downside Risks Stick Out As Share Price Dials Up

Cache Logistics Trust's 1H17 DPU of 3.6 Scts (-9.5% yoy) was in line with consensus and our expectation, at 50% of our full-year forecast. 2Q17 DPU of 1.8 Scts (-9.5% yoy) was at 25%.
Performance has stabilised qoq, with NPI up 4.2% qoq. Hence, for 2H17, we believe results would be stable qoq.
However, Cache Logistics Trust YTD share price outperformance has now made downside risks stick out.

We are worried about CACHE’s high gearing, further NPI margin pressure in FY18F and NAV erosion risks should CACHE lose the 51 Alps Ave court case.
We turn negative and downgrade the stock from Hold to Reduce.

The same yoy drags which were present in 1Q17 continued to afflict CACHE. That is, lower contribution from 51 Alps Ave, MTB (multi-tenanted building) conversion as well as the divestment of Cache Changi Districentre 3 (DC 3) in Jan 2017.
NPI improved 4.2% qoq mainly due to full quarter’s contribution from the latest acquisition of Spotlight warehouse, VIC and higher contribution from DHL Supply Chain Advanced Regional Centre (DSC ARC) and DC 1. Hence, for 2H17, we believe results would be stable qoq.

About 260.4k sq ft of leases was secured in 2Q17, which reduced leases due for renewal to a minimal 2% GRI (gross rental income) for remainder 2017.
Portfolio occupancy ticked up 1.1% pts qoq to 98.3%. Generally speaking, the manager shared that on a likefor-like basis, signing rents has declined by 8-10% yoy.

Gearing as at end-2Q remained elevated at 43.4% (1Q17: 43.1%). We believe that the manager could divest certain non-core Singapore assets to bring down gearing.
All-in finance costs improved 1bp qoq to 3.46% and there is no debt due in 2017. c.63% of borrowings is hedged into fixed rates and c.94% of distributable income has been hedged or was derived in Singapore dollar.

The YTD 17% increase in CACHE’s unit price has, unfortunately, shone the spotlight on CACHE’s downside risks. We are worried about its high leverage and further NPI margin pressure should CWT Commodity Hub (accounted for 27.5% of FY16 revenue) be converted into multi-tenancy.
Furthermore, there are NAV erosion risks if the courts do not rule in favour of CACHE, and 51 Alps Ave could be potentially devalued from S$80.9m to S$66.9m, translating into NAV erosion of 1.55Scts/unit.

There were no new updates on the 51 Alps Ave court case though we expect a resolution by year-end. In valuing 51 Alps, the valuers have assumed that CACHE would win the case. CACHE is trading slightly above mean, at 7.6% FY17F yield and 1.22x current P/BV.
We turn negative and downgrade the stock from Hold to Reduce, with an unchanged DDM-based Target Price of S$0.840.
Upside risks could include faster-than-expected improvement in Singapore logistics market, successful rebalancing of portfolio (which could in conjunction lower gearing) and favourable outcome for CACHE on 51 Alps.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-07-21

CIMB Research SGX Stock Analyst Report REDUCE Downgrade HOLD 0.840 Same 0.840