Cache Logistics Trust - DBS Research 2017-10-25: Rights Issue: Completed Once And For All

Cache Logistics Trust - DBS Vickers 2017-10-25: Rights Issue: Completed Once And For All CACHE LOGISTICS TRUST K2LU.SI

Cache Logistics Trust - Rights Issue: Completed Once And For All

  • Operations still weak but decline mitigated due to lower base.
  • Rights issue reduces gearing from 44% to 36%.
  • Rights issued at over 25% discount; forward DPU diluted by 10.5%.
  • Marginal revision in TP to S$0.83, maintain HOLD.



Attractive yield of 8%, maintain HOLD. 

  • Cache Logistics Trust (Cache) offers an attractive forward yield around 8%. It owns a portfolio comprising some of the newest warehouses in Singapore as well as high-quality warehouses in Australia, which offer sustainable returns to investors in the long term after weathering through the sector’s cyclical downside. 
  • We maintain our HOLD call owing to the near-term uncertainties of further downside risk to rentals, as well as the possibility of Cache acquiring new assets that may not be immediately DPU accretive.


Where we differ: Our DPU estimates are more conservative. 

  • Our DPU estimates are lower than consensus in FY18-19F on the back of projected lower occupancies and negative rental assumptions. Our TP is 2.5% higher than consensus mean as we applied a relatively lower discount rate after the rights issue in September 2017. 
  • The rights issue has lowered the REIT’s gearing from 40% to 36%, hence providing the REIT with stronger financial muscle to fund future acquisitions.


Potential catalyst: Resolution of the Schenker case. 

  • Resolution of the rent dispute at 51 Alps Avenue will remove some overhanging uncertainties and improve DPU (as Cache is currently receiving below the contracted rent) and stock price.


Valuation

  • TP is raised marginally from S$0.82 to S$0.83 after incorporating a lower gearing and lower discount rate following the rights issue. We have revised down FY18-19F DPUs by 10.5% from 7.13 and 7.21 Scts to 6.38 and 6.45 Scts. 
  • HOLD call maintained in view of an 8% yield.


Key Risks to Our View

  • Non-accretive acquisition. Given the high portfolio NPI yield of around 7%, it is unlikely that potential acquisitions can offer immediate yield accretion. The value-add will have to come from strong cashflows and eventually higher capital values.


WHAT’S NEW


Rights issue lowers gearing to 36% and dilutes forward DPU by 10.5% 

  • Operations still weak though decline was mitigated due to lower base. Gross revenue for 3Q17 was S$27.4m, down 2.2% or S$0.6m y-o-y, while net property income (NPI) was S$21.3m, 3.3% or S$0.7m lower y-o-y. The decline was mainly due to the divestment of Cache Changi Districentre 3 (DC3) in January 2017, and lower income received under protest for 51 Alps Ave (aka Schenker), offset by higher rental contribution from DSC ARC, Cache Cold Centre and its Australian properties. 
  • Distributable income amounted to S$16.4m, 0.8% lower y-o-y; the fall was less than NPI due to 1.9% y-o-y lower finance costs this quarter at S$4.8m.

Rights issue reduced gearing from 44% to 36% and dilutes forward DPU by 10.5%. 

  • Cache raised equity capital in September through an 18 for 100 rights issue at S$0.632 per Rights Unit, representing a 28.2% discount to the closing price on 4 Sept 2017 at S$0.88. The rights issue was 187.3% oversubscribed and Cache raised total gross proceeds of S$102.7m. 
  • On 16 October 2017, the net proceeds of S$99.9m was used to repay debt, reducing aggregate leverage from 43.6% to 35.7%. We estimate FY18-19 DPUs will be diluted by 10.5%. NAV will drop by 3.9% from 0.77 Scts to 0.74 Scts.

DPU of 1.54Scts in line with revised numbers after rights adjustments. 

  • 3Q17 DPU was 1.54 Scts, 22.5% lower y-o-y and 14.4% lower q-o-q, mainly due to the larger unit base as a result of the rights issue. 3Q17 DPU includes 0.053 Scts capital distribution from previous sales proceeds that was reserved. 
  • 9M17 DPU adjusted for the rights issue represents 74.5% of our revised full-year FY17 DPU forecast, in line with our expectations.

Occupancy above industry average; watch out for expiry of leases in FY18. 

  • The portfolio’s committed occupancy was 97.3%, higher than the industry average of 88.1%. The weighted average lease expiry is 3.2 years with minimal leases expiring during the remaining of FY17. 
  • In FY18, c.21% of leases by gross rental income will be up for renewal, the bulk is from CWT Commodity Hub, the REIT’s largest asset. So far, there is no sign of any tenant vacating. As for the Schenker dispute, no concrete development since the ‘holding arrangement’ was signed on 26 September 2016.


View on rights issue: painful but necessary. 

  • Equity fundraising was anticipated by the market, and at a discount rate over 25%, the rights issue was well received. As such, Cache Logistics Trust's stock price has been relatively stable post the issue, with the initial selloff quickly followed by a rebound. 

The dilution of 10.5% in DPU is painful, but necessary. 

  • We stressed in our last report (The boomerang of gearing) the importance of addressing Cache’s high gearing. With lower gearing, Cache now has better financial flexibility for acquisitions. 
  • We lowered the risk premium applied slightly bearing in mind that any acquisition is less likely to offer immediate DPU accretion due to the REIT’s high yield presently. 
  • We have raised our TP marginally from S$0.82 to S$0.83. Maintain HOLD.




Derek Tan DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-10-25
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.83 Up 0.820



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